CBK acts on credit squeeze after rate cap introduction

The Central Bank of Kenya (CBK) is gathering data on the credit squeeze that has hit the banking sector six months after the interest rate controls took effect.

The banking regulator said Tuesday that it was alarmed by the steep downturn in credit growth and economic activity in the regime of rate controls introduced last September.

The data is expected to guide the CBK’s policy hand in managing the industry.

“I’m a firm believer that we will go back to where we should be. It (the capping) is quite damaging to our economy and our people,” CBK governor Patrick Njoroge told the press Tuesday, adding that the institution is compiling data on the effects.

Hardest hit

The apex bank pointed out four economic areas that have that have been hit the most in the credit slowdown – trade, manufacturing, real estate and private households.

The four sectors account for 60 per cent of total credit to the private sector.

Dr Njoroge said that the banking sector has witnessed a shift from business and personal loans to corporate lending as banks seek to lower their risk exposure.

The lenders have blamed the credit squeeze on interest rate controls that have seen them shun private borrowers perceived to be risky.

“The people we expected to help, including small businesses, are the ones being damaged,” said the CBK governor.

The caps came into force last September despite a spirited attempt by banks, the Treasury and Central Bank to stop it.

The International Monetary Fund (IMF) last month also warned that the rate controls could cut economic growth by up to two per cent in two years.

The IMF says the controls are an ineffective tool to slash loan costs as the move locks out small borrowers, pushing them to more expensive options like informal lenders, overdrafts and credit cards.

Interest rate controls were introduced following a public outcry over high cost of loans that lined the pockets of banks with double-digit profits growth.