The amendment of the law capping loan rates is crucial to Kenya’s economic growth in 2018, a UK-based accountants’ body has said.
The Institute of Chartered Accountants in England and Wales (ICAEW) yesterday said it is important to resolve the issue of credit availability to small and medium-sized enterprises (SMEs), since in most economies much of the gross domestic product (GDP) growth comes from the sector.
“Kenya is no exception to this. We understand at the moment there are some limitations that commercial banks have in lending – because of the interest rate capping law. The review of interest rate cap law could be beneficial to the economy as more SMEs get access to funds,” said Michael Armstrong, ICAEW regional director Middle East, Africa and South Africa.
The law was enacted in October last year and has seen banks reduce lending to small firms citing lack of space to price in risk.
It currently caps loan prices at 14 per cent and puts floor on savings rate at 70 per cent of the central bank rate.
The Treasury and Central Bank of Kenya have supported the call for review. Credit issues have progressive grown at diminished rates since the law came in place.
Most the banks, including large ones that normally have relatively better income margins due to voluminous and cheaper deposits, are reporting reduced profit citing squeezed margins.
Speaking on the sidelines of FiRe award conference, a prelude to the main gala dinner to be held tonight, Mr Armstrong noted the country has witnessed a slight decline in GDP growth this year in part due to uncertainty created by the election process, drought witnessed earlier in the year and rate caps.
“Going forward we are predicting that the GDP could grow at 5.8 per cent in 2018 and further improve to 6.1 per cent in 2019.”
“This depends on three factors; the continuing successful execution of the various ongoing infrastructure projects. Strengthening of the global economy and the impact that it may have on tourism can benefit Kenya as well, and review of the interest rate cap law,” said Mr Armstrong.
An evaluation of the effects of the law by Kenya Bankers Association (KBA) revealed that the objectives of the regulation are not being achieved.
The assessment showed that credit is now more skewed towards secure and short-term market end.
Lenders are becoming very risk sensitive and as such are moving away from household and other economic agents that lack dependable collateral, like SMEs.