If there were any doubts about the effects of low lending rates to small borrowers following the introduction of the interest rates capping law, the latest Central Bank of Kenya data should dispel that.
According to the CBK, the number of bank loan accounts dropped by 1.35 million to 7.15 million in the past two years. The fact that the number of active loan accounts fell to 7.15 million from 8.51 million is clear proof that lenders have tightened lending conditions and locked out scores of small clients in the process.
It is time to evaluate the impact of the rate capping law as the number of falling loan accounts is worrying.
Thousands of prospective borrowers were unable to access loans from banks. Access to credit for small and medium enterprises has virtually dried up following the capping of lending rates in September 2016. As a result, interest chargeable by banks was capped at four per cent above the Kenya Bank Reference Rate.
While the proponents of the rate capping law had intended to spur access to credit by making loans cheaper, the exact opposite ensued after banks locked out the small segment of the market and started focusing on lending to government.
Many banks started directing their focus to fresh deposits to government securities instead of the private sector.
Their main argument has been that the rate capping law has denied them a chance to lend to individuals whose risk profile is deemed higher than what the law could accommodate.
This has had a detrimental effect on the general economy as growth has ultimately slowed down as a result.
We aver that it would be good if the Treasury, CBK and Parliament held sober consultations since small firms Are being edged out of the credit market.
According to the CBK data, household and personal loan accounts dropped by 519,000 while the agriculture sector lost half of its accounts.
An enabling environment is needed urgently to spur the country’s economic development.
It is time to fast-track efforts to ensure that the falling loan accounts rate is reversed. Small borrowers need to be given access to credit to enable them play their critical role in the country’s development. It’s time we also looked for alternative funding for our SMEs. The situation is bad as customers are not buying goods.
Locking out this vital segment is not a viable solution at all.
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