Wednesday 04, July 2018 by Matthew Amlôt

What’s up with the cap?

 

Kenya finance minister’s Henry Rotich’s budgetary speech included the interesting fact that the Government has decided to back a repeal of the interest rate cap on loans instituted by Parliament in September 2016

The lending rate was capped for banks and financial institutions in Kenya in September 2016 at four per cent above the Central Bank rate (which currently stands at 9.5 per cent). Rotich asserted that the rate cap has negatively impacted credit growth in the economy and decreased access to credit, especially SMEs.

The impact of the cap cannot be overstated and has faced long standing opposition both nationally and internationally, with the IMF calling for its repeal and Kenyan banks speaking out against the difficulties it creates in allowing them to price risk.

S&P states that the interest rate cap has subdued lending to SMEs in particular as corporate lending is already at a competitive level in Kenya with many loans already offered below the cap. Should the cap be removed the agency believe private-sector lending growth would increase, improving overall growth prospects.

“The IMF team urged the authorities to review the interest rate controls introduced in September 2016 with a view to abolishing them or substantially modifying them. The controls have contributed to slow overall credit growth to the private sector, and lower access to credit by SMEs and individuals. In addition, interest rate controls are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth,” said Benedict Clements, leader of a staff team from the International Monetary Fund (IMF) at the conclusion of a visit to Kenya earlier this year.

The origin of the interest rate cap was in order to curb the high rates of interest that banks were charging, which were above regional and international standards. Previously other methods had attempted to coach banks into lending at lower rates.

Forcing banks to charge artificially lower interest rates has perhaps hit the least fortunate the most, with banks unable to supply credit to SMEs and individuals. This has likely curtailed growth and is a contributing factor to Kenya’s lower-than-normal economic growth for 2017 – along with severe drought conditions and a prolonged election cycle.

The Government’s turnaround on policy was somewhat surprising but does not mean that the cap will be repealed. Kenya’s Parliament may well opt to keep the interest rate cap in place in order to maintain access to cheap credit.

In a recent report, Exotix Capital note that this marks a significant divergence from the Treasury’s previous stance in which it was targeting a risk-based system. The firm argue that there are two key ways in which the repeal could be achieved. First would be through the Finance Bill, but this has yet to be approved by Parliament, the point at which the Bill may see pushback. The second would be through the Financial Markets Conducts Bill by way of consequential amendment, which would mean the new bill would override the current banking act.

I think it is likely that we will see action of some kind to open up access to credit this year, whether it be by a repeal of the interest rate cap or via another method, such as the proposed Development Bank of Kenya.

Overall economic growth for Kenya is set to surge to near-historical norms in 2018. Improving weather conditions and a more stable political environment are positive developments for the East African nation, it just remains to be seen how the Government will tackle the country’s lacklustre access to credit.