The World Bank wants the rate capping law, partly blamed for a slowdown in credit growth, reversed, but with more policy reforms to improve access to credit and financial inclusion.
Kenya introduced the law in September 2016 effectively fixing interest rates on loans at four percentage points above the benchmark central bank rate and imposing a minimum deposit rate of 70 per cent of the key rate.
The law has been partly blamed for accelerating a slowdown in credit growth to a low of 1.7 per cent in September—the lowest in over a decade— from 25 per cent in mid-2014.
While acknowledging the slowdown started before the caps due to external shocks, the multilateral lender said they [caps] had further squeezed funds for long-term investment and tied the central bank’s hands in pointing where the monetary policy should be.
“Though important, the reversal of the interest rate cap, will not be sufficient to improve access to credit,” the World Bank said in its economic update.
The lender said this could also hinder recovery of the economy from shocks experienced this year.
It cut 2017 growth forecast for the country to 4.9 per cent from an earlier estimate of 5.5 per cent, citing headwinds such as a severe drought in the first half of the year, a slowing credit access, partly caused by rate cap law and prolonged politicking.
Among the policy changes recommended by the Brenton Woods institution include reduction of the fiscal deficit and better management of the public debt that will help lower yields on benchmark government papers.
Interest rates on Kenya’s 184- and 364-day Treasury bills have averaged 10.3 per cent and 10.6 per cent respectively this year making it attractive for commercial banks to buy them since they are considered risk-free and ignore lending to businesses.
“This crowding out has a significant adverse effect on private investment and potential growth,” the World Bank said.
“The government can reduce its domestic borrowing requirement, and the cost of credit, thereby crowding in the private sector.”
The bank also said a stronger credit scoring and sharing system would help bring down interest rates for borrowers and improve bank lending policies, while the implementation of a moveable collateral registry muted by the National Treasury earlier in the year could help in resolving bank bad loans.