Interest cap ‘complicates’ monetary policy: CBK governor

September 21, 2016
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Njoroge speaking on Wednesday following the Monetary Policy Committee (MPC) meeting held on Tuesday said although the new law will benefit existing loans, there could be adverse reactions on credit to the private sector/XINHUA-File
Njoroge speaking on Wednesday following the Monetary Policy Committee (MPC) meeting held on Tuesday said although the new law will benefit existing loans, there could be adverse reactions on credit to the private sector/XINHUA-File

, NAIROBI, Kenya, Sep 21 – The Central Bank of Kenya (CBK) Governor Patrick Njoroge says the new banking law capping interest rates at 4 per cent above the Central Bank Rate (CBR) has ‘complicated’ the monetary policy.

Njoroge speaking on Wednesday following the Monetary Policy Committee (MPC) meeting held on Tuesday said although the new law will benefit existing loans, there could be adverse reactions on credit to the private sector.

“We are not sure of how banks will behave going forward but there is a possibility that risky borrowers could be cut off, and this may lead to a huge decrease in private sector credit,” he explained.

The growth of the private sector credit is already showing a decline with the latest numbers indicating a growth drop from 17.8 per cent as of December 2015 to 7.1 per cent in July 2016 posing a risk to economic growth.

He however says they are monitoring how the new law is affecting the monetary policy and the general economy.

“It is still not clear why there is a huge decline in the growth of private sector credit, it could be due to a data issue, maybe the numbers are wrong, it could also be a slowdown of the economy which other metrics don’t support. We have also seen a delay of payments to suppliers as the large corporate are asking for longer payment periods to their suppliers from three months to about six months,” he reflected.

On liquidity in the banking sector, Njoroge says the distribution of liquidity in the banking sector has improved with average liquidity ratio up to 41.9 per cent in August 2016.

Capital adequacy ratio increased to 19.2 per cent in August from 18.9 per cent in July.

On Tuesday, the MPC lowered CBR to 10 per cent forcing banks to further lower their interest rates to 14 percent from the previous 14.5 percent.

This comes a few weeks after the banks dropped their rates to 14.5 percent in accordance with the new interest rates law approved by President Uhuru Kenyatta on August 24, 2016.

Earlier, Kenya Bankers Association had indicated credit rationing will be expected to hit the sector once the new law to cap interest rates takes effect.

The Association Chief Executive Habil Olaka says banks will be forced to prioritize low-risk borrowers.

A low-risk borrower is one who is likely to repay their loans in full and on time like cooperates and the government among others.

According to Olaka, high-risk borrowers will now face more obstacles in getting loans. If your risk is higher than the 4 per cent cap that is now in the law, banks will have to revise their lending guidelines to accommodate small and micro-finance companies, who form the backbone of the economy.

Kenyan banks have been enjoying interest rate spreads of about 11.4 per cent on average, way above the world average of 6.6 per cent.

Moreover, their Return on Earnings (ROE) was at 30 per cent while for banks in other places such as Europe it is at 7 per cent, South Africa is at 15 per cent.

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