Industrial and Commercial Development Corporation (ICDC) has announced a three percentage point reduction in loan interest as it fights to retain a competitive edge under the new rate capping era which has seen banks cut charges.
The State-owned ICDC said on Monday that it has, from November 1, been charging interest on loans at 13 per cent, down from 16 per cent, which is one percentage point below the commercial bank maximum lending rate.
The move is meant “to help young businesses and entrepreneurs at various stages of their business cycle to spur growth by leveraging on the medium and long term loans offered by ICDC.”
“Our rates and terms of lending have been modest in the industry. The average bank lending rates have been 18.3 per cent before the commencement of the new law while ICDC has been lending at an average of 16 per cent,” said ICDC acting executive director Kennedy Wanderi.
The development finance institution said its board had resolved to review the cost of loans after President Uhuru Kenyatta assented to the Banking (Amendment) Act 2016 that came into force on September 14.
“The corporation welcomes the Government’s resolve to reduce the cost of borrowing as it is set to increase the level of investments.
‘‘With the decrease in the cost of borrowing, the uptake of loans across the economy is expected to go up thereby stimulating economic growth,” said Mr Wanderi. The rate capping law sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR). The law also sets the minimum returns payable by banks on customer deposits at 70 per cent of the CBR.
The CBR is currently set at 10 per cent, meaning that banks are barred from charging interest on loans above 14 per cent.
ICDC’s rate cut comes on the back of a general interest rate reduction by other financial institutions.
It comes as the government mulls over merging the sixty-year old ICDC with the Tourism Finance Corporation (TFC) and the Industrial Development Bank (IDB Capital) to form the Kenya Development Bank (KDB) or Biashara Bank in a bid to address ICDC’s capital challenges.
Saccos have also been reducing loan rates in order to remain competitive after banks were forced to cut the price of lending in line with the new law.
The saccos’ pricing at an average 12 per cent per annum has been their biggest selling point, getting them steady business.
Despite the price-cut by ICDC, a recent study showed that majority of small businesses in Kenya consider commercial banks and State-backed funds as inappropriate sources of finance, opting instead to use family resources as start-up or growth capital.
The Kenya National Bureau of Statistics said in a newly released report that 80.6 per cent of establishments use family or own funds as the main source of start-up capital.
Another 4.2 per cent of business owners get loans from family or friends to start business.