Kenya Central Bank Warns of Adverse Effects of Capping Rates

  • Bill limiting lending rates yet to get president’s approval
  • Lenders warn they will lock out risky individuals, companies

Kenya’s central bank said it is concerned about the potential effects of changes to legislation approved by lawmakers Thursday that limit how much lenders can charge for loans.

Members of parliament in East Africa’s biggest economy agreed to the changes that cap maximum interest at 4 percentage points above the key Central Bank Rate, currently at 10.5 percent. They also agreed to criminalize the act of lending at costs higher than those prescribed by the law. 

“While appreciating the underlying sentiments about the need to lower the overall cost of credit, we continue to express concern on the adverse consequences of capping interest rates,” the central bank said in an e-mailed statement from the capital, Nairobi. “This would include inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission.”

The banking regulator said it would continue working with different arms of government to find a solution that “sustainably reduces the cost of credit.”

Commercial lenders extended loans at a weighted average rate of 18.25 percent in May, according to the most recent statistics from the central bank. Kenya’s financial authorities have repeatedly asked them to reduce loan charges to stimulate demand for credit.

Wrong Medicine

The new law, which still needs a final approval from the president, will force banks to lock out low-income earners and small businesses they consider as high-risk borrowers from accessing credit, pushing them into the arms of informal and unregulated lenders, National Industrial Credit Bank Managing Director John Gachora told reporters.

“The disease is well diagnosed, but the medicine is entirely wrong,” said Gachora, who is also the vice chairman of the Kenya Bankers Association. “The moment you start prescribing at what rate banks should lend, you kill innovation and roll back gains made in sector.”

Weak credit reference resources are among factors that increase the risks of lending for banks, according to lenders.

Banks’ cost of raising money has also gone up, fueled partly by the government tapping the domestic market to finance a budget deficit estimated at 9.3 percent of gross domestic product, Joshua Oigara, chief executive officer of KCB Group Ltd., owner of Kenya’s largest bank by assets, said in an interview.

“You have to address those issues in the market if you want to reduce the cost of credit,” Oigara said.

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