Treasury Principal Secretary Kamau Thugge has downplayed the effect of rate caps in stifling private sector lending, arguing there was a steady decline in demand prior to the new law.
Dr Thugge reckons that ahead of the September 2016 controls, lending to private enterprises and mid-sized entrepreneurs by banks had already slowed down.
“Credit expansion to the private sector has been decelerating for some time. By the time the interest rate law came into effect, credit expansion was already low,” the PS said at a pre-budget briefing on Thursday.
“It is, therefore, too early to tell the impact of the interest rate cap law as there was already an underlying decline in credit to private sector.”
The Treasury says it is a paradox that the economy has registered sustained growth in the three quarters of 2016 — at 5.9 per cent GDP growth in Q1, 6.2 per cent in Q2 and 5.7 per cent in Q3 — yet banks have alleged a credit squeeze due to the caps.
The Banking (Amendment) Act 2016, sets the ceiling for lending rates at four percentage points above the benchmark rate and the floor for deposit rates at 70 per cent above the base rate.
The signal rate is currently at 10 per cent, meaning lending rates are capped at 14 per cent and deposit rate at seven per cent.
Lending to the private sector remained relatively flat at Sh2.2 trillion in the 12-month period to October 2016 ahead of the capping law taking effect.
Banks want law scrapped
Commercial lenders say they want the interest rate capping law scrapped, claiming that the legislation is hurting low income borrowers, in their latest push against the Banking (Amendment) Act 2016.
The Kenya Bankers Association (KBA) warned Wednesday banks will divert more funds to treasury bills and other opportunities in the forex market rather than lend.
“I think the solution is to remove the law and consider some of the proposals that had been put forward by banks (prior to the new law) to address the issue of costly credit,” said KBA chief executive Habil Olaka.
The commercial banks claim their research indicates that the rate cap is harmful to the economy.
“According to the consumer research we have commissioned, most bank customers are not necessarily borrowing or saving more because of the Act, which raises the question, is this Act helping or harming our economy?” asked Mr Olaka.