Kenya: Is the interest rate cap coming off?

Kenya: Is the interest rate cap coming off?

It is now a year since an amendment to the Kenyan Banking Act of 2016 capping interest rates on loans at 4% above the Central Bank rate – which stands at 10% – came into force.

Twelve months later the exercise has brought home sobering lessons for the Kenyan economy and the banking sector as a whole. The Central Bank of Kenya (CBK) is now contemplating reverting to the free-market regime that existed before capping was introduced.

The capping of interest rates was viewed as a populist move when enacted even though the proponents, had explained it as a cushion to protect consumers from high interest rates charged by banks at the time. Before the interest rate cap, Kenyan banks charged an interest rate spread of 11.4% which was 5% higher than the global average.

Even though there had been previous attempts to persuade banks to lower their interest rates, these had been unsuccessful until last year when Parliament unanimously passed the amendment.

At the time when the interest rates amendment became law, local private equity firm Cytonn Investment issued a warning that the move was bad for the Kenyan economy: “We are of the view that capping interest rates might solve the high interest rate spreads in the banking sector, but will lead to other challenges such as locking out of SMEs and other ‘high risk’ borrowers from accessing credit as banks will prefer to loan to the government, [thus] straining small banks who effectively have been shut out from the interbank […]

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