7 June 2018

Kenya: Uhuru Adviser Says Rate Cap Tweak Should Cushion SMEs

The restrictions on the movement in interest rates should be changed to cater for the different default risks of sectors and also cushion the small and medium enterprises (SMEs), a senior economic adviser to President Uhuru Kenyatta has said.

The adjustment should take into account various factors including costs such as taxes incorporated in loans, that affect the sectors, Mr Mbui Wagacha said.

The Central Bank of Kenya (CBK) should be in a position to offer extra liquidity to commercial banks that lend to SMEs as long as the institutions can demonstrate they have a pipeline of loan requests and have already lent good amounts to the sector in the past.

He noted that the plan had been tried and tested in the UK.

The Treasury has already announced plan to guarantee SMEs lending, but modalities of the fund's operations are still unclear.

"The rate cap should be amended such that the law caters for the different segments of bank lending because they have differing default risks. There should be some flexibility for banks, for example, in relation to agriculture, trade, SMEs, households and others," said Dr Wagacha, an economist who previously served as chairman of the CBK.

He added that amendments can take account of the fees and charges on the segments as well as taxes that go with the loans, which increase the cost of borrowing.

However, he said amendments to the law should be accompanied by enactment of other legal provisions that modernise the role of the CBK to enable it play a bigger role in the economy as the monetary authority.

Key among the changes would be to set up the Financial Conduct Authority to take charge of the role of protecting consumers of credit. The body would be an operationally independent unit of the CBK.

Kenya

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