Treasury downplays rate cap credit squeeze effect

National Treasury CS Henry Rotich (left) and Principal Secretary Kamau Thugge. Dr Thugge has downplayed the effect of interest rate caps in stifling private sector lending arguing there was a steady decline in demand prior to the new law. PHOTO | SALATON NJAU | NMG 

By HERBLING DAVID

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Summary

• PS says slowdown in lending to private sector had started even before the new law came into effect in Sep 2016
• Lending to the private sector had remained relatively flat at Sh2.2 trillion in the 12-month period to October 2016.
• KBA warned Wednesday banks will divert more funds to Treasury bills rather than lend to individuals and firms.

Treasury principal secretary Kamau Thugge has downplayed the effect of interest rate caps in stifling private sector lending arguing there was a steady decline in demand prior to the new law.

Dr Thugge reckons that ahead of the September 2016 controls lending to private enterprises and mid-sized entrepreneurs by banks had already slowed down.

“Credit expansion to the private sector has been decelerating for some time. By the time the interest rate law came into effect, credit expansion was already low,” the PS said at a pre-budget briefing Thursday.

“It is therefore too early to tell the impact of the interest rate cap law as there was already an underlying decline in credit to private sector.”

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Sustained growth

The Treasury says it is a paradox that the economy has registered sustained growth in the three quarters of 2016 – at 5.9 per cent GDP growth in Q1, 6.2 per cent in Q2 and 5.7 per cent in Q3 — yet banks have alleged a credit squeeze due to the caps.

Lending to the private sector remained relatively flat at Sh2.2 trillion in the 12-month period to October 2016 ahead of the capping law taking effect.

Commercial lenders say they want the interest-rate capping law scrapped, claiming it is hurting low-income borrowers, in their latest push against the law.

The Kenya Bankers Association (KBA) warned Wednesday banks will divert more funds to Treasury bills rather than lend to individuals and firms.

“I think the solution is to remove the law and consider some of the proposals that had been put forward by banks (prior to the new law) to address the issue of costly credit,” KBA chief executive Habil Olaka said.