It’s time to scrap interest rate cap

The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG
The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG 

A steady, affordable and sufficient capital access is necessary for private sector economic growth, particularly in Kenya’s small scale industry.

Ardent steps by government agencies to ensure this is the case have been made, particularly targeting women and youth.

Entrepreneurs say there is need for a concerted effort to ensure this capital pool touches various aspects of the economy and does not come with “unaffordable strings attached, referring to prohibitive bank interest rates that have choked small scale business growth.

Perhaps the more reason why interest rate capping law was introduced and enjoyed a spirited fight by parliamentarians, leading to its signing into law in September 2016 and coming into force in October, 2016.

One year down the line, the law is being seen as counterproductive. Banks are having none of it.

The sector has lost close to Sh26 billion owing to the interest rates capping law and this is not all. In a rare display of solidarity, the banking sector regulator CBK has given a signal that “the law is hurting the economy”.

“It is in our interest as a central bank to work to reverse these measures and let ourselves go back to a regime with freely determined interest rates but in a disciplined environment,” the Governor, Patrick Njoroge, said.

But the hard task of convincing Parliament to repeal it lies ahead, putting paid to Dr Njoroge’s position that he cannot tell when the law will be repealed.

Yet even the Central Bank’s firm position on the cost of money has not convinced all Kenyans that it is time to change course.

“Where ceilings are imposed with no alternatives, there is a risk of opening up a pandora’s box of illegal credit markets. Therefore, a reversal of the interest rate cap law is a welcome decision” says Muthoni Muriuki a Nairobi- based consultant.

This is a concern shared by Nancy Makau: “The loss here is actually not actual loss, it is just lower than the billions that they are used to. Banks should revise their strategy, not the interest.”

Ms Makau is referring to the Sh26 billion interest income loss that banks have suffered.  

Falgun Bhojak, a Nairobi- based businessman argues that it is about time banks borrowed from their international counterparts.  

“Fourteen per cent is still high, let them ask a European or British bank how they make money and they have around two per cent interest in mortgage and personal loans.

They encourage people to buy houses and make business investments. A bank cannot just make losses because interest rates were capped. So comparing with 17 per cent and above to 14 per cent is not right” Mr  Bhojak said.

So why all this attention to banks?

Apart from being highly liquid, I’d argue it is the one sector of the economy that is the pulse of the business climate. Basically, lend more, unlock business and investment opportunities and help improve living standards.

Perhaps this may be an overwritten statement in Kenya’s vision 2030 reports, to make this poverty alleviation question factor in these banking conversations and ensure credit is channelled to these small scale drivers of our economy is where the rubber meets the road.