Before the law on interest rate cap came into effect, lending institutions were often accused of charging high rates and earning huge profits at the expense of borrowers.
The law on interest rate cap was passed in September 2016. Its aim was to lower interest rate charges on loans and to make credit accessible to individuals and small businesses.
Central bank of Kenya recently conducted a study to evaluate the impact of the rate cap on Kenya’s economy. The study notes that, “…our analysis shows that interest rate caps have started to yield negative effects….”
According to the regulator, o
The other negative impact is the shift in lending from the private sector to government. In the period under review, 18 Commercial banks moved funds from private businesses to government securities. The interest rate law was meant to increase accessibility of loans to the private sector, but the study shows it has had the opposite effect.
The study by CBK noted that under the new law, transparency in the banking sector has declined. Lenders have devised new ways to offset the limit on interest charges. The result is higher loan costs contrary to the purpose of the rate cap law.
Small banks have suffered huge declines in interest income and capital levels since the interest rate cap law came into effect. In order to operate profitably, small banks are merging to form larger entities that can compete with the big lenders.
Banks have recorded higher levels of credit risk in the period after interest rate cap. Medium banks have suffered the biggest impact whereby gross Non performing loans to gross loans ratio increased from 10 percent to 23 percent in the period between June 2016 and June 2017. Small banks also booked a similar trend.
Central Bank predicts that the interest rate cap law will slowdown economic growth by 0.4 basis points due to the lowered credit to small businesses and private persons.
Despite the many negative effects of the law, the interest rate cap has brought efficiency to the banking industry. Most banks have had to review their operations to cope with the reduced interest income.
CBK notes that the effects of the rate cap law have surfaced in the one year period. The market regulator notes that these effects may be amplified in the long term if there are no changes to the law.