19 October 2017

Kenya: Bankers Call for Removal of Interest Rate Caps

Nairobi — Kenya Bankers Association is calling for the removal of interest rate capping, a year after it was passed into law.

KBA CEO Habil Olaka says the law has had adverse effects on the economy despite its good intentions.

Olaka said that the law, which was expected to provide low-cost credit and ultimately increase credit uptake has done the opposite as it has instead affected credit growth and discouraged financial inclusion. It was also expected to encourage a savings culture through increased deposits.

It was also expected to encourage a savings culture through increased deposits.

KBA, however, says that deposits - demand and fixed - have shown little evidence of being responsive to the intentions of the law.

At the same time, credit has been skewed towards secure and short-term market end, mainly away from household loans, and has shown a bias towards trade than investment loans.

"It is increasingly becoming evident that the expectations of the law are not being met. For instance, lenders are trading asset quality to portability that is tolerance of lower returns on government papers instead of lending to private sector even at the level of the cap. This is because crowding out is increasingly becoming prevalent," Olaka said.

In June 2017, for instance, while about 3.2 million loan applications were made, only about 1.1 million of loans were

disbursed, a 34 per cent success rate.

Jared Osoro, Director of Research and Policy at KBA added that the overall economy is hurting as a result of a worsened economic performance due to the undeniable link between credit to the private sector and output growth.

The cap was introduced at a time when credit growth was already declining, further exacerbating the credit squeeze.


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