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Kenyatta: Capping Interest Rates Hurt Kenya’s Economy

President Uhuru Kenyatta has admitted that capping the interest rate a bank can charge on loans did not work as expected and even negatively affected the performance of the Kenyan economy.

The law capping interest in Kenya came into force in 2016 and set the maximum lending rate at no more than four percentage points above the Central Bank Rate.

The law was introduced following a public outcry against the high cost of credit.

Kenyatta said the implementation of the law was “expected to lower the cost of credit and also increase access” to credit.

Unfortunately, said Kenyatta in a national address on Tuesday, “the law has had an adverse effect on the economy and reduced the amount of available credit.”

Experts had warned Kenyatta against taking the populist route of capping interest rates and ignoring the consequences of the policy.

In Uganda, experts said all Kenya needed were long term solutions to address the money supply side constraint as well as dealing with the issue of Government borrowing and the relatively high cost of doing business.

Banks’ interest rates are determined by the cost of funds, the lending risk, the Treasury bill rates on the risk free public sector borrowing, rate of savings relative to borrowing, the fundamental macroeconomics indicators like inflation and exchange rates, the level of non-performing loans and the Bank’s administrative and operating costs.

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Interest caps are based on the notion that caps on loan prices will protect borrowers from excessive interest rates thereby increasing credit affordability and access to finance.

However, according audit firm PwC’s manager, Doreen Mugisha, interest rate caps can actually hurt low-income populations by limiting their access to finance.

“If the interest rate cap is set too low, banks will find it difficult to recover costs and will most likely reduce service delivery in rural areas and other more costly markets,” she observed in a published article.

Kenyatta yesterday said the removal of the interest rate cap in November last year “will facilitate the availability of more credit to businesses which will in turn increase the circulation of money.”

Constraints 

He added: “I urge the Central Bank to use the full range of instruments of regulation and policy at its disposal to prevent predatory lending and ensure that banks can offer loans at affordable interest rates.”

Kenyatta said he was determined to remove all constraints to the growth of Micro, Small and Medium Enterprises (MSMEs), emphasising, “MSMEs are the lifeblood of our economy.”

The sector accounts for more than 80 percent of all businesses in Kenya, create around 75 percent of the jobs and are key contributors to broad-based and inclusive economic growth.

But MSMEs face many challenges, which reduce their competitiveness and constrain their growth and sustainability.

As a result, the contribution of MSMEs to the country’s gross domestic product (GDP) is only 30 percent, a figure that could be much higher if they were to realise their full potential.

Kenyatta said government intends to increase access to affordable credit to MSMEs, which, because of their informal nature and lack of collateral securities, had been locked out of the formal credit market.

“Five commercial banks have set aside 10 billion shillings to be lent to MSMEs at an interest rate of 9 percent per annum, in loan amounts ranging between 30, 000 to 250,000 shillings,” said the president,

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