The Central Bank of Kenya has cautioned against capping interest rates, arguing that the move will lead to adverse consequences including inefficiencies in the credit market, credit rationing, promotion of informal lending channels of lending hence undermining the effectiveness of the monetary policy transmission.
Kenya’s Parliament on Wednesday passed a Bill capping bank interest rates at four per cent above the Central Bank Rate (CBR), leaving the final decision to the President to sign the Bill into law or reject it.
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The Central Bank however agrees with the public sentiment that cost of credit in the country is too expensive but said that all stakeholders need to find an appropriate solution that will sustainably reduce the cost of loans.
“While appreciating the underlying sentiments about the need to lower the overall cost of credit, we continue to express concern on the adverse consequences of capping interest rates. This would include, inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission.” CBK said in a statement.
On Thursday, Kenya Bankers Association urged President Uhuru Kenyatta to reject the Bill seeking to cap interest rates as it would hit small borrowers hardest.
