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Interest rate cap removal fails to excite borrowers

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • A majority of banks are yet to register increased demand for lending despite the lifting of interest rate cap 17 months ago to accommodate riskier borrowers.
  • A credit survey for March by the Central Bank of Kenya (CBK) shows that 82 per cent of credit officers drawn from different lenders had not witnessed an increase in loan requests despite the move.

A majority of banks are yet to register increased demand for lending despite the lifting of interest rate cap 17 months ago to accommodate riskier borrowers.

A credit survey for March by the Central Bank of Kenya (CBK) shows that 82 per cent of credit officers drawn from different lenders had not witnessed an increase in loan requests despite the move.

“Eighty two per cent of the respondents indicated that after the repeal of interest rate capping law, the demand for credit remained unchanged while 18 per cent noted that demand for credit increased,” shows the survey.

Credit to the private sector dropped to a 13-month low of 7.65 per cent in March, partly weighed down by the risk averseness of lenders in an environment of rising loan defaults since the onset of coronavirus disruptions.

Some 62 per cent of the credit officers believe that the repeal of interest rate capping will still have little or no impact on the expected credit granted in the second quarter of the year.

The regulator has since the lifting of rate caps on November 7, 2019 been tracking the impact of the move on demand for credit, lending to SMEs, actual credit granted, and non -performing loans (NPLs).

Small and medium sized enterprises—who were deemed riskier and left out in rate cap regime—have not benefited much with 76 per cent of respondents saying the lifting of the cap has not had any effect on SME portfolio.

However, about fifth of the respondents say the removal of rate caps has helped them accommodate riskier SMEs in their loan book.

“Twenty four per cent of the respondents indicated that the repeal had increased their lending to SMEs since majority of the banks are on-boarding risk based pricing models which has increased financial institutions appetite to lend to SMEs,” says the CBK survey report.

The pace of growth in lending posted in March remained below CBK’s target of 8.5 per cent and a projected double digit growth this year.

CBK was tying a strong recovery in lending on an optimistic outlook in the year and pick-up in economic activity year.