The fight concerning the commercial lending rate cap on banks in Kenya has been on for a while with international organizations like the IMF noting the need to remove the cap. Yesterday, the president of Kenya requested that lawmakers remove cap on the commercial lending rate and insisted that he will not approve the 2019/2020 (June – July) budget unless the cap is lifted.
The rate cap of 400bps above the central bank rate (currently 9.0%) was introduced in 2016. The sole aim of the cap was to expand access to credit for businesses and SMEs. However, the impact has been the opposite with banks shifting lending from individuals to government and a collapse of bank credit to SMEs. The IMF earlier this year showed that since the introduction of interest rate control in Kenya, there has been a hit on lending activities as well as financial intermediation of banks and in extension, the rate of economic growth.
In our opinion, the removal of the interest rate cap is positive for Kenya’s fast-growing economy as this will help stop the current credit leakages and further encourage banks to lend to the real sector.
However, the already delayed budget if further delayed might impact economic activities negatively.
UNITED CAPITAL RESEARCH