Kenya is planning to scrap interest rate caps on bank charges, as its central bank research revealed that the policy has impacted negatively on the economy on Wednesday.
“Implementation of the law was expected to lower the cost of credit and increase access. However, emerging evidence points to adverse effects of the law on the Kenya economy,” the study says.
The bank revealed that the interest rate caps infringe on the independence of the Central Bank and complicates the conduct of monetary policy. It also found that under the interest rate capping environment, monetary policy produces perverse outcomes.
Kenya in 2016 introduced interest rate control through an Act of Parliament that requires lenders to pay interest at the rate of 70 percent of the Central Bank Rate (CBR) on term deposits and also limits lending rates to not more than four percentage points above the CBR. This was implemented following consumers outcry over the increasing cost of credit.
Its current interest rate caps seem to have undermined the conduct of monetary policy as the Central Bank of Kenya (CBK) noted that credit to the private sector has also reduced, despite the increase in demand for credit after introducing the legal caps.
“Structure of revenue of banks has started to shift away from interest income. In addition, some banks have exploited the existing approval limits to increase fees on loans in a bid to offset the loss in interest income,” CBK explained.
The Kenyan monetary authority plans to also complete outstanding policy reviews by June this year that includes the review of the interest rate caps that could see an increase in loan cost.
“The decision to review the CBR was made on the backdrop of a contained inflation and signs of a strong fiscal consolidation at the Treasury,” the central bank governor Patrick Njoroge explained.