IMF calls for review of interest rate cap law

Six months after being signed into law, controls on interest rates is yet again stirring debate among Kenyans.

With the Banking (Amendment) Act 2016 capping interest rates at four percent of the central bank rate, consumers were expected to access affordable credit from commercial banks.

But since august, access to credit has been in short supply.

This has seen the International Monetary Fund (IMF) weigh in on the issue, calling for a revaluation of the capping of interest rates.

According to the IMF, interest rate controls pose a threat to Kenya’s financial stability and slow down economic growth.

“The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth,” the IMF said in a statement.

From the onset, banks opposed the law capping interest rates arguing credit supply may shift those deemed to have low risk.

When signing the law, President Uhuru Kenyatta took this into account, adding the treasury and the CBK would monitor its short term effects.

“We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms,” President Kenyatta said in August.

The Banking (Amendment) Act 2016 requires banks to charge a maximum of four percentage points above the prevailing 10 percent CBR. The minimum interest on fixed-term deposits was fixed at 70 percent of the CBR, further eating into profit margins of the lenders.

The introduction of the cap has seen major restructuring in the banking sector, with the industry driving a shift to digital banking to lower operating costs.

This has seen commercial banks downsize.

But even as the pressure bites, lawmakers are planning further amendments to the banking act.

Kikuyu MP Kimani Ichung’wa has introduced a bill in Parliament seeking to among other things seeks to implore ministries and state agencies to bank with banks in which the government has a stake.

Mr Ichung’wa said the proposal would ensure the government is able to negotiate for favorable rates from institutions in which it has a stake in.

“The Treasury (which is represented in the boards) can negotiate for an interest rate below six percent and that will bring down the cost of borrowing for the government and the SME sector,” Mr Ichung’wa argues.