Central Bank turns to data to determine cap law effects

Central Bank turns to data to determine cap law effects
CBK Chairman Mohamed Nyaoga, Treasury CS Henry Rotich & CBK Governor Patrick Njoroge at a past event

The Central Bank of Kenya (CBK) has commissioned three separate surveys that aim at analyzing the real impact of interest rates capping introduced last September.

The move follows concerns from both the government and banks that the decision had had the unintended consequence of limiting credit supply to Kenyans.

The CBK has from the outset expressed its reservation on the interest capping law but has maintained that there was need to address how banks relate with borrowers.

Speaking a day after the monetary policy committee (MPC) retained the central bank rate at 10 percent, CBK governor Dr Patrick Njoroge said there had been a shift in loan issuance in the country, with banks favoring corporate and government lending, starving millions of Kenyans from accessing loans.

“We cannot create data. It all depends with how clear the data is. That is where we should let the researchers do their job without interference. There is a commitment whenever the first one is ready we will share. I don’t want to predict what the data will show. Let the chips fall where they may. We are not saying that we expect this or that. Let the data show what is,” Dr Njoroge told journalists.

Private sector credit lending has slowed down to four percent amid concerns by banks of the perceived high risks associated with personal and business loans.

But rather than speculate, Dr Njoroge said the three studies will pinpoint areas the law has had a major impact with the view of tweaking the law.

“The idea here is not to support hypothesis is to let the data speak, what does the data tell us and that I think will be the best for all of us, and so bare with us as we refine the conclusions,” he said.

According to the central bank, banks have introduced tighter credit standards.

This has seen credit growth decline to 4.6 percent last month from 13.6 percent in July of 2015.

The regulator said individuals as well as small and medium sized businesses continue to be affected by the lack of credit access.

However both the Treasury and the CBK say that while changes may be made, it was unlikely to revert to the regime that existed before the capping law was introduced.

“Think of what would happen if monetary policy committee decided to lower rate. What would happen to the people who were getting loans around14 percent? They would be too risky in the new regime. They will just be selected out. And the outcome would be maybe lowering of rates leads to less lending,” Dr Njoroge stressed.

Banks have up to the end of April to present new business plans to the CBK indicating how they will support growth without over relying on interest income.

Report by Patrick Igunza and Sophie Kinoti 

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