IMF says interest rate capping may weigh down Kenya’s growth

January 26, 2017
IMF says establishing a formal interest rate corridor remains a priority for strengthening the monetary policy framework/FILE

, NAIROBI, Kenya, Jan 26 – The International Monetary Fund (IMF) has urged Kenya to remove interest rates control introduced in August 2016.

IMF says the controls, which limit interest rates to 4 percent above Central Banks’ lending rate, are likely to reduce access to credit and weigh down on growth.

The fund has also reiterated the importance of setting a formal interest rate corridor so as to strengthen the monetary policy framework.

“They (capping) also complicate monetary policy and adversely affect banking sector profitability, especially for small banks. Although the adverse effects of the controls are manageable in the near term, if maintained, they could potentially pose a risk to financial stability,” says IMF’s Executive Board.

IMF has been against rate-capping from the onset but continue to urge the regulator to put in place systems that prevent predatory lending and increase competition and transparency in the banking sector.

President Uhuru Kenyatta signed into law the Banking (Amendment) Bill, 2015 aimed at regulating interest rates charged by banks now at 14 percent.

Analysts have predicted squeezed profits for banks as net interest margins are expected to fall.

Banks felt the full impact of the revised banking act capping interest rates in October with Profit before Tax declining by 14.7 percent.

Central Bank of Kenya shows banks made a profit of Sh10.9 billion in September, but dropped to Sh9.3 billion in October, the full month the sector operated under the new law.

Loan book quality continued to decline with Non-Performing loans ratio closing the month at 9.3 per cent from 9.1 per cent in September and 5.7 per cent in October 2015.

Full effect will be felt in quarter four of 2016 numbers.

The IMF Board however, lauded Kenya’s macroeconomic stability and reduced external imbalances.

The Institution also noted Kenya’s planned fiscal consolidation, targeting a 3.7 percent of GDP deficit by 2018/19 from 7.8 percent in 2015/16 period, remains critical to maintain a low risk of debt distress while preserving fiscal space for development priorities.

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