A recent High court ruling declared the law on lending rate caps as unconstitutional. The court gave a period of 12 months for the law to be reviewed. According to Moody’s, this is an opportunity for the central bank, commercial banks, government ministries, and private sector representatives to influence lawmakers to repeal the law or make helpful amendments.
Several studies have shown a decline in lending to the private sector ever since the lending rate cap law was introduced in September 2016. In 2017 and 2018, credit growth to small businesses and high-risk enterprises dropped to below 5 percent compared to the double digit growth rate at the start of 2016.
Analysts at Moody’s Investors Service argue that the removal of the rate cap will benefit Kenyan banks and the overall economy. In a recently released report, the analysts say, “A revision to the cap that no longer constrains bank lending would be credit positive for Kenyan banks because it would gradually lead to higher private sector credit growth, boosting banks business activity and overall economic growth.”
The repeal of the law will benefit Kenyan banks through increased interest income, increased lending to the private sector, and higher business activity. Interest charges declined to 13 percent from an average of 18 percent in the era before interest rate caps.
Moody’s analysts note, “A major risk is the potential for lawmakers to persist in wanting to maintain strict controls on lending rates.” Such a move will lead to limited credit availability to small businesses and high-risk individuals.