Interest rate cap law favours only the rich, bankers now say

The interest capping law has failed to achieve its key objective of increasing credit uptake by households and micro and small enterprises, the Kenya Bankers Association has said.

According to KBA, over 1.2 million SMEs and households have lost out because bank credit allocation favours the rich, and large, well established businesses.

In its third report released on Friday on the impact of interest rate capping introduced by Parliament in the third quarter of 2016, the association said the law has instead stifled access to capital with the number of loan accounts reducing by 1,229,242 between 2016 and 2017. The KBA CEO Habil Olaka said the situation has been caused by tight lending conditions which have occasioned a two per cent declining rate of private sector credit expansion from the the 20 per cent rate that exited in 2015.

“The Act introduced a distortion which the credit markets have not been able to recover from. Typically, the Kenyan credit market rebound within three months of any given shock, but in this case, the rate caps have prolonged if not exacerbated the declining trend of credit growth. The fact that access to credit has continued to decline up to 14 months later means the caps are stalling the recovery and thus slowing down overall growth,” Olaka said.

Olaka said the average loan size had increased by 47 per cent, meaning that established and larger companies are finding it easier to access capital at the expense of small and medium enterprises, which form the foundation of the country’s sustainable economic development.

“It is evident that the anticipated recovery of the private sector credit growth following the enactment of the law has not been  realised as expected. Thee notion that lower cost of credit would lead to the reversal of the declining rate of growth has been disapproved beyond doubt,” he added.

According to KBA, the credit market has settled on short term and secured loans as a result of the operating environment that has left banks with little recourse due to heightened sensitivity and rising non-performing loans.

“The controlled environment has accelerated the digitisation trend and made staff and branch rationalisation more compelling. More than 20 bank branches were closed and more than 1,400 staff laid off during 2017. This indicates he rate capping is not in the best interests of the broader economy nor the households and businesses the law sought to support,” the CEO added.

The association chair however maintained that all stakeholders should come together and chat on the best way forward and fix  areas the public feels are necessary such as enhancing pricing transparency, industry governance, ethics and supporting smes.

The formulation of the Banking (Amendment) Act 2016 was motivated by the need to increase credit uptake by facilitating access to loans, particularly for smes and households.




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