Banks have said only removal of the interest rates cap could release credit flow to the private sector, responding to President Uhuru Kenyatta’s announcement in Wednesday’s State of the Nation address.
President Kenyatta said in his address in Parliament that he was concerned about reduced lending since interest rate controls took effect in September 2016.
Most of the banks that have announced their 2016 full-year results have reported shrunken loan books in the period, with personal and SME loans taking the biggest hit due to their relatively higher risk profile.
More lenders have ramped up their purchase of government debt in search of risk-free double-digit returns.
“On the issue of access to credit for SMEs, it is unfortunate that the un-intended consequence of the capping of interest rates was a slow-down in lending by our commercial banks,” Mr Kenyatta said in the national address.
The growth in credit dropped from 16.8 per cent in January 2016 to 4.3 per cent in December as per the latest Central Bank of Kenya figures.
“This is an issue that concerns us and is one that I will actively seek to resolve so that credit can start to flow again to the real drivers of our economy,” said the President.
Banks say the problem of reduced lending and high interest rates cannot be addressed within the framework of controlled lending and deposit rates, adding that other policy interventions will be effective.
“The rates cap needs to be removed so that banks and the government can work together to implement solutions proposed earlier,” said Mr Habil Olaka, the chief executive of the Kenya Bankers Association (KBA).
“The law was passed in good faith, but the negative consequences we highlighted are now emerging.”
Mr Olaka said KBA had proposed a list of interventions to help bring down the cost of credit, including more prudent fiscal and monetary policies, which will set a lower base for interest rates in the country.
He added that de-risking land deals through maintenance of proper records and faster processing of transactions will also boost lending to borrowers using land as collateral.
It remains to be seen whether the government will move to amend or repeal the law, which has polarised opinions.
Individuals and businesses able to get loans are benefiting from the prevailing interest rate of 14 per cent, which is significantly lower than the average of 18 per cent before the rate caps.
A large number of prospective borrowers have, however, been denied loans, with banks giving priority to those with the highest credit scores.
Banks blame the slowdown in lending to the private sector on the law that sets one price for all risks, ignoring the fact that there are major differentials in ability to repay among borrowers.
The lenders previously accommodated various categories of borrowers by charging different rates, with small businesses and individuals with insecure jobs paying the highest interest.
Banks say control of interest rates means riskier borrowers now find it difficult to access loans because they cannot fit within the current ceiling of 14 per cent.
“When quality becomes king, volume becomes vanity. No bank can sustainably lose 10 per cent of its loan book,” said Mr James Mwangi, Equity Group’s chief executive when announcing the bank’s results on Wednesday.
A protracted slowdown in lending to the private sector risks hurting economic growth by curtailing investment and consumption.