Experiment on interest rate caps perhaps the worst policy decision in Kenya’s history: study

Small and Medium Enterprises (SMEs) missed out on average Ksh.300 billion in credit/loans from commercial banks on each year that followed the placing of holds on lending, a new survey shows.

The survey by ICEA Asset Managers which draws from the Central Bank of Kenya (CBK) private sector credit entries denotes a notable slump in credit to domestic businesses in the aftermath of September 2016 interest rate cap entry.

“Since late 2016 we saw private sector credit take a steep fall even as we saw private sector credit growth recover in the past year,” noted Judd Murigi, ICEA Lion Head of Research.

According to data from the CBK, annualized private sector credit fell to its lowest rate in 2017 at Ksh.47billion from Ksh.382billion in 2014 before picking up to Ksh.60billion in 2018.

At the same time, SME loans as a proportion of net credit in the market dipped to 15 percent in 2019 from an average 25 percent in the pre-cap era.

The potential downside of Ksh.300billion in un-disbursed loans to SMEs is meanwhile estimated at an equivalent one percent of Gross Domestic Product (GDP).

Among the hardest hit sub-sectors in the period were construction and trade from their registry of depressed economic output.

ICEA Chief Investment Officer Barack Obatsa taunts the stay of interest rate caps as one of the worst policy directives by the State in recent years from quantified role in the creation of a severe cash-crunch in the recent past.

“The experiment on interest rate caps is perhaps the worst policy decision in a record number of years where we saw a record number of SMEs downsize or close shop,” he said.

Further to the severe crunch, interest rate caps accelerated the accumulation of commercial banks non-performing loans (NPLs) which peaked at a double digit rate of nearly 13 percent in June 2019.

Private sector credit growth has however turned a new leaf in recent months, with available data in 10 months to October 2019 rating the recovery at 4.2 percent from 3.4 percent in 2018 or an equivalent Ksh.160 billion.

Trade, manufacturing, consumer durables and households were the greatest beneficiaries from the transition in growth having sipped in at least 85 percent of all existing credit lines across 2019.

Credit in the pre and post rate cap environment has remained largely concentrated in the same segments with households taking up a substantive 17 percent of gross loans.

Private sector credit is expected to round off to Ksh.200 billion for the just concluded year while the outlook for 2020 sets sights on a much improved credit push to Ksh.300 billion.

Improved liquidity from November’s repeal of interest rate caps is expected to offer impetus to the expected recovery flanked by lower withholding Value Added Tax (VAT) and the prompt clearance of supplier bills by the government.

Moreover, the CBK is expected to anchor the recovery from its expansive monetary policy accommodation with further projected cuts to the Central Bank Rate (CBK) to a maximum of 50 basis points.