Interest rate cap law may be revised but not scrapped – Fitch Ratings

October 23, 2017 (5 weeks ago)
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The Central Bank of Kenya is in favor of market-based forces to control interest rates/FILE

, NAIROBI, Kenya, Oct 23 – Parliament is unlikely to scrap the law that introduced interest rate capping despite the adverse effect it has had on private sector lending, international rating agency, Fitch Ratings says.  

Fitch instead sees an amendment to the law that may allow the capping rule to apply only to retail customers.

In its latest assessment, Fitch is of the view that rate caps are not uncommon in emerging markets.

“The Kenyan rate cap is unusual, however, in that it is a blanket rate cap on all loans; in other markets, rate caps typically apply only to specific segments, such as retail lending, generally for the purpose of consumer protection,” notes a commentary on the Fitch Wire credit market.

The Banking Amendment Act set a lending ceiling of 4 percent above the Central Bank rate – which has been at 10 percent since the capping came into force a year ago.

Credit to the private sector has halved in two years leading bankers to call for the removal of the interest caps.

“We expect new lending to remain subdued as long as the rate cap remains in place,” says Fitch.

Though the law was meant to protect retail consumers from high interest rates, the agency says the intended benefit is offset by a slowdown in lending, “as banks shy away from lending to higher-risk sectors such as SMEs and from granting long-term loans.”

On Friday, Kenya Bankers Association said that deposits – demand and fixed – have shown little evidence of being responsive to the intentions of the law, which set it at 70 percent of the CBR.

Bankers say credit has been skewed towards secure and short-term market end, mainly away from household loans, and has shown a bias towards trade than investment loans.

“It is increasingly becoming evident that the expectations of the law are not being met. For instance, lenders are trading asset quality to portability that is tolerance of lower returns on government papers instead of lending to private sector even at the level of the cap. This is because crowding out is increasingly becoming prevalent,” KBA Chief Executive Habil Olaka said.

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