Government might consider scrapping interest rate capping

March 27, 2017
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Treasury Cabinet Secretary Henry Rotich says the continued decline of credit access to the private sector is a major concern but added it is still too early to intervene/FILE

, NAIROBI, Kenya, Mar 27 – The Government will consider revising the law that introduced interest rate capping in September last year if the regulation has an adverse impact on the economy. 

Treasury Cabinet Secretary Henry Rotich says the continued decline of credit access to the private sector is a major concern but added it is still too early to intervene.

Rotich has, however, said the tightening of liquidity cannot be solely attributed to interest capping as other factors are at play causing a slowing down of credit to the private sector.

“Two banks were placed under receivership which put some strain on the financial sector. There is also a general phenomenal because we have also seen some decline in other neighboring countries which do not have caps. When we put this together, caps could not be the only thing that has slowed down the private sector credit,” said Rotich

Financial analysts have also downplayed the impact of the interest rate capping law on the decline of credit to the private sector in 2016 as well as the decline in banks’ profits.

READ: Rate capping not to blame for depressed private sector borrowing, analysts say

Cytonn Investments analysts attribute the slowdown in credit to structural factors in the banking sector as opposed to monetary policy.

“While it is expected that private sector credit growth will stabilize at low levels, it is yet to be attributed to the interest rate caps, bearing in mind private sector credit growth had slumped for the 13th consecutive month, to 5.4 percent in August 2016, before the Banking Amendment Act came into effect,” Analysts watched.

According to statistics from the Kenya Bankers Association, private sector credit growth slowed down from 17 percent to 5 percent between January 2016 and August 2016.

The interest rates cap came into effect in August 2016 where banks were forced to only add a flat interest of 4 percent over the Central Bank’s rate.

Between August 2016 and December 2016 private sector credit growth stabilized at 4 percent.

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