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Interest rate cap yielding negative impact on Kenyan economy

 

NAIROBI, Kenya–A report by the Central Bank of Kenya on the impact of interest rates cap on the economy has revealed that interest rate caps have started to yield negative effects on the Kenyan economy.  

The study highlights that the interest rate caps infringe on the independence of the central bank and complicates the conduct of monetary policy. It is found that under the interest rate capping environment, monetary policy produces perverse outcomes.

It further elaborates that rate cap has resulted to reduced intermediation by commercial banks – there has been significant increase in average loan sizes arising from declining loans accounts, mainly driven by the large banks, thus shunning the smaller borrowers.

The banks have shifted lending to Government and the large corporates. The study further indicates that whereas demand for credit increased following the capping of lending rates, credit to the private sector has continued to decline.

The study underscores that the structure of revenue of the banks has started to shift away from interest income. In addition, some banks have exploited the existing approval limits to increase fees on loans in a bid to offset loss in interest income.

Though it says that the banking sector remains resilient, it however highlights that, small banks have experienced significant decline in profitability in recent months, which may complicate their viability.

In conclusion study states that exclusion of MSMEs by the commercial banks would lower growth by 0.4 basis points in 2017 mainly on account of the reduced access to credit by the MSMEs.

They note that these effects have emerged in the last one year; however, they may become magnified in the medium to long term as was the case during the post-independence period.

The objective of this study was to investigate the impact of the interest rate capping on the Kenya economy.

The law capping interest rates became operational on September 14, 2016. It was implemented following concerns raised by the public regarding the high cost of credit in Kenya which may have impacted on access to loans by a large segment of the population. Implementation of the law, therefore, was expected to lower the cost of credit and increase access to credit.