15 October 2018

Kenya: SMEs Credit Seen Staying Low Even After Rate Cap Review

The World Bank says proposed amendments to interest rate capping laws to remove the minimum interest to be paid on deposits while retaining control on maximum price of loans may not help small businesses access loans.

It warns in its latest report on Kenya's economy that the removal of the floor on customer deposits could increase banks profitability without necessarily increasing lending to small and medium-sized enterprises (SMEs).

The proposed amendments to interest rate caps, which the National Treasury is still pursuing, retains the ceiling on loan at policy rate plus four per cent but eliminates the floor on deposits-set at 70 per cent of the policy rate.

Improved profitability

"This partial modification lowers the cost of funding for banks thereby, improving profitability. Whether this will translate to higher lending will however be dependent on the "risk-free" rate of government securities," says World Bank.

To the extent that yields on government securities remain high, World Bank warns that more banks will continue to be incentivised to lend to the government rather than customers such as SMEs perceived to be riskier.

It sees such modification only lowering cost of funds for banks and increasing return on equity. Re-igniting lending to the private sector would require yields on government securities to decline, something World Bank doesn't see happening.

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