‘Repeal Interest Rate Caps’: Cytonn

Interest rate caps should be repealed because they curtail economic growth, Investment Management company, Cytonn, has said prior to a meeting by the Monetary Policy Meeting (MPC) by the Central Bank on October 24th.

The President explained that assenting to the Bill would hurt the economy.

The legislation was repealed last March because the High Court found it to be contrary to the interests of Small and Medium Enterprises (SME’s), known as as it lessened their ability to access credit.

Parliament has been given a duration of a year to amend the Bill such that it reflects the interest of all stakeholders, after which two thirds of the House members will be able to pass the Bill.

The KBA has also said that if removed, the rate cap law would not have an adverse on borrowers who had taken out loans prior to the change.

But has it always been smooth sailing for interest rates in Kenya? Have there been hitches along the way?

” Back in 2011 and 2001, attempts were made by Parliament to pass legislation of interest rates but they did not follow through,” states the International Monetary Fund.

Stakeholders like the Central Bank of Kenya and National Treasury also expressed their hesitancy with the law when it was given the go-ahead three years ago. So did the President when he did pass his assent to the proposed rate cap law in 2016, arguing that it could encourage informal banks, ” states a 2019 report by the Interantional Monetary Fund titled “Do Interest Rates Control Work?”

The report further observes that: ” While lending to corporates and domestic borrowers continued after introduction of the rate cap law, loans to the SME sector declined by about ten percent. A year after the rate cap law was introduced in 2016, the credit by small banks which rely on lending to SME’s declined by five percent, while lending to the public sector increased by 25 percent as focus shifted from the private sector after the rate cap law was introduced until October 2017.”

The Kenya Bankers Association notes that about the time that the interest rate cap law was being introduced in 2016, the overall share of loans to SME’s was about 18 percent, though higher than that of larger banks.

But compared to larger banks, smaller banks lent more to the SME sector , known as “risky borrowers” at 40 percent, as compared to larger banks, whose loan portfolio to the sector was 18 percent.

Cytonn cites a World Bank report on the adverse effect of interest rates in 76 countries globally.