Why Interest Rate Capping Law Will Continue to Strangle Kenya’s Private Sector

The Kenyan economy plunged at an unprecedented rate in the second quarter of the year.

The Port of Mombasa

Jibran Qureishi, Regional Economist for East Africa at Stanbic Bank has said Kenya’s private sector activity will continue to be strangled if the interest rate capping law remains in place.

He was commenting on the latest Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI) for Kenya whose findings indicate that activity was affected by cashflow problems, partly arising from a backlog of bills from government departments.

According to the index, manufacturing and services fell to 52.9 from 54.1 in July. Any reading above 50 indicates growth. “It marked the fourth monthly improvement in a row, but was the softest since May.

In May, the index stood at 51.3.

“To ensure inclusivity in economic growth, urgent reforms ought to be conducted on improving accessibility to credit for companies, in addition to a consistent plan by the government to clear arrears owed to the private sector,” said Jibran Qureishi, regional economist for East Africa at Stanbic Bank.

“Both these factors have restrained private sector activity. In fact, the interest rate capping law continues to strangle the private sector and if the law remains in place in its current form, it will only add to the plight of the private sector,” he added.

Similarly, Fitch Ratings further reiterates that the rate cap has caused banks to shy away from lending to perceived riskier sectors as it has limited their ability to price correctly for risk. “This has contributed to a slow down in lending to the private sector, particularly to SMEs which are the bulk of Kenya’s economy.”

READ: SMEs will drive growth in 2019 if access to finance is unlocked – CBK

“Banks have also shifted their asset mix in favour of government securities which offer attractive yields relative to their lower risk and a carry a capital benefit.”

Fitch Ratings states that the loan rate cap has also contributed to asset quality weakness.

Amendments to the Banking (Amendment) Act 2015 were introduced by Kiambu Central MP Jude Njomo and signed into law in August 2016.

The law capped the maximum loan rate at four percentage points above the Central Bank Rate (CBR) and the minimum deposit rate at 70 percent of CBR.

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