NAIROBI (Xinhua) --
Kenya’s interest rate capping law that was put in
place in 2016 has reduced the access to loans for Small and
Medium Enterprises (SMEs), the banking industry lobby said on
Habil Olaka, the CEO of the Kenya Bankers
Association (KBA), told a media briefing in Nairobi that while
the law was well-intentioned, it has failed to achieve its key
objective of increasing credit uptake by households and micro
and small enterprises.
"There is a clear indication that the law has not succeeded
in increasing access to loans to the low cadre of the economy,
but rather created conditions that favor the upper end of the
economy," Olaka said when KBA released its third report on the
impact of the interest capping law which restricts banks to
price loans at four percent above the Central Bank Rate.
The report is among a series of KBA survey that have shown a
consistent trend of adverse effects occasioned by the Banking
(Amendment) Act that was introduced by parliament in the third
quarter of 2016.
Olaka said contrary to its spirit, the law has significantly
stifled access to capital with the number of loan accounts
reducing by 1.2 million accounts between 2016 and 2017.
He added that interest rate capping has contributed to the
continued decline in the growth of credit to the private sector
by introducing a distortion in the market which the credit
markets have not been able to recover from.
According to the banking lobby, the credit market has
witnessed five shocks between 2012 and 2017 and in each event
the markets have recovered within three months of the event with
the exception being after the introduction of the interest rate
"If this price control was good for the economy, the credit
market would have seen an uptick by January 2017.
"The fact that credit growth has continued to decline up to
14 months later means the caps are stalling the recovery and
thus pulling down our economy," Olaka said.
The CEO added that the notion that the lower cost of credit
would lead to the reversal of the declining rate of growth has
been disapproved beyond all doubt.
Jared Osoro, KBA Director of Research and Policy said that
the introduction of interest rate caps has seen the average loan
size increase by 47 percent, indicating that established and
larger companies are finding it easier to access capital at the
expense of micro enterprise, which form the foundation of the
country’s sustainable economic development.
Osoro noted that the operating environment has left banks
with little recourse other than to limit credit to the small
scale borrowers due to heightened sensitivity to risk of rising
non-performing loans levels.
He added that the law has occasioned a crowding-out effect,
with the government securities becoming more attractive
investment avenues than private sector enterprises.
According to KBA, while banks had in the past taken up
efficiency initiatives enabled by technology, the controlled
environment has accelerated the digitization trend and made
staff and branch rationalization more compelling.
"More than 20 bank branches were closed and more than 1,400
bank staff were laid off during 2017," he said.