The International Monetary Fund (IMF) has stepped up pressure on Kenya to review the interest rate controls, saying they were hurting Small and Medium Enterprises (SMEs).
This comes after the Government sent out mixed signals that it would consider reviewing Banking Act 2016, which caps interest rates on loans and deposits.
Credit growth has hovered around a 13-year low, with the Government fearing this might curtail economic growth as the private sector is denied credit.
After a team from the Bretton Woods institution visited Kenya recently to assess its economic and financial development, it reiterated its concerns regarding the “legislated limits on deposit and lending rates introduced last September.”
“Preliminary information suggests that these controls have had unintended negative consequences on the availability of financing for small and medium-sized enterprises, with the risk of reversing the remarkable increase in financial inclusion observed in recent years,” said IMF in a statement. The IMF delegation met National Treasury Cabinet Secretary Henry Rotich and Central Bank of Kenya Governor Patrick Njoroge, among other key players in the country’s economic and financial sector. President Uhuru Kenyatta during the State of the Nation address expressed frustration over the inability of Kenyans to get credit from banks despite the lowering of interest rates, noting that his administration would look into the matter before elections.
“On the issue of access to credit for SMEs, it is unfortunate that the unintended consequence of the capping of interest rates was a slowdown in lending by our commercial banks,” said the President.
“This is an issue that concerns us and one that I will actively seek to resolve so that credit can start to flow again to the real drivers of our economy.” Another US-based global lender has also expressed concern over the weakness in credit growth to the private sector, in what is turning out to be an all-out war against the populist legislation by the Bretton Woods institutions.
The World Bank in its 15th edition of the Kenya Economic Update has noted credit growth was hovering at a 13-year low of 4.3 per cent, compared to the average of about 19 per cent.
The global lender predicted a tough time for sectors such as durable household purchases such as cars, houses and firms in manufacturing, construction and real estate which it said “have traditionally been intensive in the use of bank loans”.
“Given the supply-side factors that are likely to prevail, we don’t expect credit growth to reach its long-term average in the near term,” said the World Bank. The legislation was well-received by most Kenyans who thought it redeem them from ‘greedy’ banks that for long enjoyed huge interest rate spread- the difference between what the lender gets from interest rate on loans and what it pays on deposits.
Before the onset of the law, lenders gave out loans at as high as 28 per cent even as some depositors received measly one per cent on their deposits. President Kenyatta described banks as being insensitive to the plight of ordinary Kenyans who found the cost of credit beyond their reach.
“These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns,” said the President.