World Bank Warns Kenya Against Capping Commercial Bank Rates

Plans by Kenyan lawmakers to impose caps on commercial-bank interest rates risk curbing loans and forcing lenders to pay less for deposits, and the country should instead focus on boosting competition, the World Bank said.

Legislators in East Africa’s biggest economy have proposed an amendment to a finance bill currently before parliament to cap lending rates and set minimum deposit rates, while Finance Minister Njeru Githae said on Feb. 14 commercial banks should cut their lending costs. Lenders including Equity Bank Ltd. and Kenya Commercial Bank Ltd. increased their loan rates last year, some to as high as 25 percent, after the central bank increased its benchmark rate to a record 18 percent to curb inflation.

Capping interest rates would lead to fewer loans, encourage borrowing from informal lenders at higher rates and force banks to pay less for deposits, possibly resulting in some of them closing down, Johannes Zutt, the World Bank’s country manager in Kenya, said in an opinion article published in the Daily Nation newspaper today.

“The best way to lower the price of money is not a distortive interest-rate cap, but open competition,” Zutt said. “If members of parliament want to lower interest rates, they should do everything in their power to increase competition.”

Competition could be improved by making it easier for banks to obtain collateral and less costly to realize collateral when borrowers default, Zutt said.

‘Notoriously Unreliable’

“Particular attention should be paid to improving the land registry, which is notoriously unreliable,” he said.

Banks should also make their rates, fees and penalties more transparent, allowing borrowers to make comparisons to ensure they get the best deal, while the establishment of “effective” credit-reference bureaux would enable lenders to have better knowledge of their customers, he said. Increased competition would also help the government sell its remaining interests in some lenders in the country, Zutt said.

The progress made by Kenya in recent years in strengthening its financial industry and improving stability may be threatened if interest-rate caps are introduced, he said.

“It would be unfortunate for Kenyans if these great achievements were now discarded through enacting a poorly conceived and counter-productive interest-rate cap,” Zutt said.

Average lending rates in Kenya are currently 20.04 percent, according to the central bank.

To contact the reporter on this story: Paul Richardson in Nairobi at pmrichardson@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.