CBK governor backs return of costly loans to fuel growth

Central Bank of Kenya Governor Patrick Njoroge
Central Bank of Kenya Governor Patrick Njoroge. FILE PHOTO | NMG 

The Central Bank of Kenya (CBK) has renewed its push for the scrapping of controls on the cost of loans, terming the current interest rates cap law as a drag on economic growth.

Governor Patrick Njoroge said Tuesday the limited access to credit was hitting small and medium-sized businesses hardest, yet they are key drivers of growth.

“There is a potential soft spot (in the economy). This concerns the micro small and medium enterprises (MSMEs). MSMEs are at the bottom of the pyramid. The MSMEs is where the employment is,” said Dr Njoroge at a media briefing in Nairobi following Monday’s Monetary Policy Committee (MPC) meeting.

“These are traders in Gikomba, Muthurwa in Nairobi, in Kongowea in Mombasa, mechanics in Ogopa Lane in Kariokor, traders in Kondele in Kisumu or even furniture makers on Ngong Road. “All these are institutions that are small and have substantial growth potential,” added the governor.

“The question is how can, they expand their businesses? Finance is part of the answer. In a sense in 2019 we need to deal with (the rate cap) otherwise it can be a drag on the economy.


“This is the business we need to deal within the next few weeks, in the next few months.”

Banks have rationed loans to small enterprises following the passage of a law in September 2016 capping the cost of loans at four percentage points above the central bank’s benchmark rate in an attempt to lower borrowing costs for businesses and individuals.

Although the aim was to help small traders access capital at affordable rates, the rate cap had the opposite effect, as lenders deemed SMEs too risky to lend to, arguing they could not price their default risk accurately while the cap was in place.

The CBK data shows private sector credit grew by just 2.4 per cent in the 12 months to December 2018, compared to three per cent in November.

The credit growth remained well below the central bank’s target rate of 12 to 15 per cent which is deemed adequate to support economic growth.

Kenya’s economy is likely to expand by 6.3 per cent this year, the governor said yesterday, lowering an earlier projection of 6.1 per cent. Kenya’s economy expanded faster in the third quarter of last year than in the same period the previous year due to strong performance in the agricultural and construction sectors.

The economy grew six per cent in the third quarter of 2018, compared with 4.7 per cent in the same period in 2017. Yesterday’s call is the latest clamour by the CBK boss who has all along been opposed to the interest rate caps.