Treasury says interest cap not sustainable as review gathers steam

The scrapping of the interest cap law may take longer than anticipated as the Treasury now reviews the long ranging challenges to credit access in the country.

This even as the government now says the cap is not sustainable.

National Treasury Cabinet Secretary Henry Rotich on Thursday said the challenge with scrapping the cap on interest rates at the moment was the fact that there was no concrete analysis of what is behind slow credit access in the country.

“Caps are short term solutions. You put them because you have no option, but they are not sustainable. Sustainable reforms are first based by enhancing competition in the sector, having a banking sector that is stable and well regulated,” Mr Rotich said.

The remarks appear to mark a thought turnaround with the government now singing a different tune from a year ago as it pushed for the capping of interest rates.

However with credit access remaining a challenge for small, medium and large borrowers, a thorough review on its impact is now underway with the treasury keen to get a working solution.

“With stability in interest rates hopefully they will stabilize at a much lower rate than even what’s being put in the caps,” he said.

According to the treasury there are a myriad of challenges the government, the central bank and commercial banks are yet to factor in addressing the hurdle in accessing credit.

This comes at a time credit growth grew at a slow pace of 1.7 percent.

Drawing an analogy of the East African region where credit growth has also been in single digits, Mr Rotich said a systemic review of the credit regime would give policy makers and players in the banking sector a better overview.

“The credit that we see, it’s difficult to wholly attribute to caps. We have seen the same phenomena in countries that don’t have caps. If Tanzania here, Rwanda, Uganda, credit growth is the same as ours yet they do not have caps then it says there could be some other things at play which is happening in the economies of sub-Saharan Africa which is not only cap related,” Mr Rotich stressed.

The Central Bank of Kenya (CBK) kicked off the debate on the effectiveness of the interest cap saying it was time to review it since it had failed to yield the desired results.

The banking regulator however insisted there would need to be a culture change to the way banks operate, pushing for a more disciplined lending regime, before going back to a market determined regime.

The caps, Mr Rotich said would be dealt with at an appropriate time following the release of a detailed analysis of small and medium enterprise sector credit growth.

“The analysis we are doing is so important so that we can dis aggregate what is associated with caps and what is not associated with caps….that way we make an informed decision and help even the debate about interest rates here in Kenya,” he said.