Manufacturers want the law capping the cost of loans reviewed, arguing that it has stalled the flow of credit to small and medium enterprises. The Kenya Association of Manufacturers, an industry lobby, yesterday termed the law “counterproductive” to SMEs, which rely 89 per cent on domestic bank lending.
The interest rates cap law, enacted last September through the Banking (Amendment) Act 2016, put a limit of four percentage points above the Central Bank Rate, presently at 10 per cent, on interest bank charges on loans.
“The introduction of interest rate cap has largely been deemed counterproductive, not only because it has driven contraction in lending but also because it has influenced banks’ expectations of insufficient yield to compensate them for risk in smaller companies,” KAM said in its 10-point economic agenda report, which was presented to a section of political parties yesterday in Nairobi. The interest rates law has attracted both praise and criticism from businesses and policymakers.
Those in support say it was important to tame the runaway cost of loans, while those opposed to the legislation say it has crippled the Central Bank of Kenya’s monetary policy making role.
The volume of loans to the manufacturing sector dipped 4.64 per cent last year to Sh277.4 billion from Sh290.9 billion in 2015, the Kenya Economic Survey 2017 data shows.
Manufacturing projects approved by industrial financial institutions, however, increased to 365 in 2016 from 251 a year earlier.
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The increment, the sector’s umbrella body said, is linked to a rise in micro and small enterprises financed by the Kenya Industrial Estates (KIE) — a state entity set up in 1967 to fund indigenous entrepreneurs. Contribution of the manufacturing sector to the country’s GDP stood at 9.2 per cent in 2016.