In the past decade, Kenyan banks charged extremely high-interest rates on loans. The exorbitant rates were viewed as a hindrance to financial access, greater investments, and economic development.
In September 2016, Kenyan lawmakers introduced a law on interest rate controls, ranked as one of the most drastic regulations in the world. The regulation put a maximum limit on the lending rate at 4 per cent above the Central Bank Policy Rate and a minimum limit on interest payment on deposits at 70 per cent of the Central Bank Rate.
The lending rate cap law was meant to increase access to credit among small scale traders, spur economic growth, and improve earnings on deposits.
However, a paper by the IMF shows that the regulation has had the opposite effects of what was intended. According to the paper, lending to the small and medium-sized enterprises declined by 10 per cent one year after the law came into effect. Additionally, the number of loans issued by small banks decreased by 5 per cent in the 12 months after the lending rate cap law was introduced. Banks have increased lending to the government and have reduced their lending to the private sector. Small banks have been the most affected as they recorded the highest profit decline due to the interest rate controls.
Lastly, the interest rate limits have made it difficult for the Central Bank to regulate policy rates in response to changing economic conditions. The Central Bank governor Dr. Patrick Njoroge has repeatedly expressed his dissatisfaction with the law.
The findings by IMF show that the lending rate cap negatively affected GDP growth by between 0.25 per cent and 0.75 per cent yearly. Some of the proposals in the IMF report are; setting the ceiling high enough to allow banks to lend to high-risk borrowers, and the use of alternative regulations such as progressive tax policies.
Also Read; Tier 3 Banks Bear the Biggest Brunt of the Interest Rates Cap Regime -SIB
