The law caps interest on loans at four percentage points above the Central Bank Rate. PHOTO | FILE
By NEVILLE OTUKI, notuki@ke.nationmedia.com
In Summary
- But the CBK has projected that the economy will grow by 5.7 per cent this year, slowing down from 5.9 per cent in 2016.
- Interest rate controls were introduced after public outcry over banks’ high cost of loans that saw the lenders record double-digit profit growths every year even as other sectors of the economy stagnated.
- The IMF says the controls are an ineffective tool to slash loan costs as the move locks out small borrowers, pushing them to informal lenders who are even more expensive.
The International Monetary Fund (IMF) has warned that
the banking interest rate controls of last September could cut economic
growth by up to two per cent in two years.
The institution says in its latest review of Kenya’s economy
that capping the cost of loans will reduce access to credit as
commercial banks shun small businesses, slowing down economic activity.
“Under the baseline, the effects will be to reduce growth by about 1 percentage point a year,” the IMF says in its review.
The interest rate controls were introduced after a
public outcry over the banks’ high cost of loans that saw the lenders
record double-digit profit growths every year even as other sectors of
the economy stagnated.
The Central Bank of Kenya has projected that the
economy will grow by 5.7 per cent this year, slowing down from 5.9 per
cent in 2016.
The IMF says the controls are an ineffective tool
to slash loan costs as the move locks out small borrowers, pushing them
to informal lenders who are even more expensive.
The alternative recourse for small and micro
enterprises is short-term credit like overdrafts and credit cards, which
are again more costly.
“Small and micro enterprises often rely on small
banks for their loans. Interest controls are likely to hit these small
banks harder, which often have to pay higher deposit rates than bigger
banks. Interest controls limit the capacity of small banks to pass on
these higher costs of deposits to their borrowers,” the fund says.
It adds that large banks are not spared either as they may close unprofitable branches and render hundreds jobless.
“Both factors will reduce competition and the
provision of banking to the population, as experienced in Italy in the
1970s,” IMF says.
Shrink banks’ margins
The monetary fund last week issued a brief note,
calling for the scrapping of the caps that are seen to shrink banks’
margins, triggering a wave of layoffs in recent months.
Parliament passed the law capping interest rates last August.
The caps took effect a month later despite a spirited attempt by banks, the Treasury and Central Bank to stop it.
The law caps interest on loans at four percentage points above the Central Bank Rate.
“Instead of facilitating affordable lending,
ceilings on lending rates often lead to lower financial access for the
poor and underprivileged. Caps on lending rates lead to a reallocation
of lending from small borrowers towards the government and large private
borrowers (e.g., corporates), as they tend to be cheaper to
administer,” the institution says, citing similar controls’ downsides in
Bolivia, Colombia, Ecuador, Peru, Poland and Zambia.
It says that Kenya should drop the caps and allow
competition and transparency be the guiding forces that determine the
price of credit.
The Kenya Bankers Association has all along opposed the caps, saying they weaken banks and slow down growth.
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