Interest rate caps on bank loans are a bad idea. All that has happened is that banks have stopped lending to smaller customers because they think a four percent spread above the central bank interest rate is not worth the risk. Instead, they put their money into safe government Treasury Bills which carry interest rates of up to 11 percent.
Kenya would be better off if the interest rate cap was removed, or if it was made more flexible, say up to 8 percent above the CBR.
Paradoxically, institutions are now lending to small customers at truly exorbitant interest rates.
A Star analysis on Monday showed that mobile lending apps, many linked to banks, were charging between 70 and 180 percent interest on an annualised basis. Many customers don't notice because the interest is charged monthly or daily.
(See https://www.the-star.co.ke/news/2019-05-13-how-mobile-cash-lenders-fleece-you-using-apps/)
Such high interest rates are excessive. Parliament has stopped bank lending to small customers but has ignored the genuinely punitive interest rates charged by mobile money apps.
Parliament should either lift or ease the interest cap on bank loans, and introduce a cap on mobile money loans.
Quote of the day: "You hit somebody with your fist and not with your fingers spread."
Heinz Guderian
The German tank general died on May 14, 1954.
