Last week on Thursday, the High Court declared the banking law on interest rate cap as unconstitutional, null and void. The law (section 33C of the banking act) limits the amount of interest rate commercial banks charge at 4
Since the law came into effect in August 2016, credit to the private sector has significantly declined to 2 percent from as high as 16 percent at the start of 2016. Under the interest rate cap era, banks have increased lending to government which presents low risk of default than the private sector.
Some analysts are happy with the court ruling that annuls the rate cap law. The Chief Economist for Africa at the Standard Chartered Bank told Bloomberg, “Anything that boosts private-sector credit extension will be a positive for the Kenyan economy,” while referring to the decision by the High Court.
However, analysts at Faida Investment Bank have a different opinion. In their weekly report, the analysts noted that if section 33c of the banking law is repealed, as the court ruling demands, the private sector will be at a loss as they will bear the high cost of loans.
The analysts argue that improved access to credit by the private sector is not guaranteed. According to the Faida Investment Bank report, “…annual private sector credit growth was already on a consistent downward trend (from 16.8% in January 2016 to 6.8% in July 2016) even before enactment of the interest rate cap.”
Analysts at FIB believe that the decline in credit to the private sector is not linked to interest rate cap law. Instead, public sector driven growth (aggressive investment in infrastructure projects by government) is to blame for the slowdown. In their conclusion, FIB notes that “….unless there is a fundamental shift in the growth engine of the economy-lower proportion of public sector led growth to higher proportion of private sector led growth – the government will continue to crowd out the private sector.”
