Companies

World Bank renews call for removal of interest rate cap

wb

World Bank Country Director Felipe Jaramllo. FILE PHOTO | NMG

The World Bank has renewed its push for the scrapping of controls on the cost of loans, saying the current interest rates cap law is constraining economic growth.

However, the Bretton Woods institution says the government should first institute reforms that will lower the cost of credit for individuals and businesses ahead of the removal of interest rate controls.

“Regarding private sector credit growth policy could intervene by addressing factors that led to imposition of interest rate caps and by building a consensus for its eventual reform,” said Felipe Jaramillo, Kenya World Bank country director in the lender’s latest economic update for Kenya.

“Making these changes will also restore the potency of monetary policy, which is essential in responding to shocks emanating from changes to the business cycle.”

Kenya put a cap on interest rates in September 2016, in a bid to lower costs for individuals and businesses. But the measure has had the effect of stifling the credit market as banks became more cautious in their lending, as economists predicted.

Private sector credit grew just 3.4 percent in the year to February, well below CBK's target rate of 12-15 percent that is needed to support economic development as individuals and small businesses bore the brunt of the reduced flow of loans to the economy. Meanwhile, commercial banks have turned to big companies and lending to the government in efforts to grow and defend their profits.

Kenya's seven biggest banks increased their investments in government paper by 9.7 percent last year to Sh700.6 billion, in turn seeing their interest earnings from securities go up by 13.7 percent to Sh76.3.billion.

The tier one banks include KCB #ticker:KCB , Equity #ticker:EQTY , Co-operative Bank #ticker:COOP , Standard Chartered #ticker:SCBK , Barclays Kenya #ticker:BBK , Diamond Trust Bank and Stanbic #ticker:DTBK .

They all grew their loan books at a slower pace of 3.6 percent or Sh57.3 billion to Shl. 63 trillion, and saw the interest income from loans to customers go up by a similar rate to Sh192.9 billion.