The Finance and National planning parliamentary committee has opposed a move to repeal the interest rate cap as suggested in the Finance Bill of 2019. However, the parliamentary committee chose to maintain the lending rate cap, which requires commercial banks to provide loans at interest rates not exceeding 4 per cent above the central bank rate.
Acting Treasury CS Ukur Yattani had proposed repealing the rate cap to make credit more accessible to small and medium-sized businesses.
When making a case for the repeal, the CS explained that interest rate caps hurt business borrowers. “Since the interest caps were introduced, lending to the government was increased as credit increased by 2.3 per cent up from 19.9 per cent while for the private sector, credit reduced by four per cent, making it 72.8 per cent,” said Mr Yattani.
On the other hand, Parliament Committee opposed the move arguing that a credit system with no rate caps leaves room for misuse. Parliamentary committee Chair Mr Joseph Limo contended that he would not expose Kenyans to inflated credit rates for the benefit of lenders.
Furthermore, Mr Limo suggested segmenting interest rates into high and low rates. Later, the regulator can progressively administer the rates to benefit high profile lenders and cushion small income borrowers.
Interest rate caps are barring access to credit.
While the parliamentary committee posits that the interest rates protect the low income from predatory rates, the reality is a far cry. A report by the Kenya Bankers Association shows the economy suffered a blow from the interest ceiling.
For instance, the rate followed a 1.4% decline in GDP following the move’s blow to the banking sector. Also, the report shows a drastic drop in SME lending following the enforcement of the cap.