Interest Rate Capping Law Prohibits Over 1.2m SMEs & Individuals from Accessing Credit- KBA Report
The Kenya Bankers Association (KBA) has made public its third report on the effect of the interest capping law which prohibits banks to price loans at four percent above the Central Bank Rate (CBR).
The report indicates that the interest capping law has been a failure because it has not increased the access to credit form MSMEs and households. Instead, the law has made it difficult for the aforementioned parties to access credit with the number of loan accounts dropping by 1.2 million accounts between 2016 and 2017.
“The formulation of the Banking (Amendment) Act 2016 was motivated by the need to increase credit uptake by facilitating access to loans, particularly for micro and small enterprises and households. Further, the legislation sought to enhance economic growth by promoting a savings culture through interest rates regulation, a radical shift from conventional principles of a market-driven business environment,” said Habil Olaka, chief executive KBA during the report release today.
Moreover, the average loan size has surged 47 percent, an indication that established and larger companies are accessing capital more easily than micro enterprises which are one of the largest contributors to the country’s economic growth.
Dr Olaka said: “This is a clear indication that the law has not succeeded in increasing access to loans to the lower cadre of the economy, but rather created conditions that favour the upper end of the economy. The survey further shows a significant slowdown in private sector credit. Indeed, the rate of credit growth was already on a downward trend, but we can demonstrate that the Act introduced a distortion which the credit markets have not been able to recover from. Typically, the market can rebound within three months of a shock, but in this case, the rate caps have prolonged if not exacerbated the declining trend of credit growth”.
The report originated from one of KBA’s surveys that have indicated a constant trend of the negative impact of the Banking (Amendment) Act introduced in the third quarter of 2016.
KBA discovered that the credit markets experienced five shocks between 2012 and 2017 but recovered after three months at each event. However, the same has not happened with the rate capping law.
“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,” said Olaka adding that the idea that lower cost of credit would result in the “reversal of the declining rate of growth has been reversed beyond all doubt.”
According to KBA, the current environment has left banks with fewer options because of increased sensitivity to risk and increasing non-performing loans. As a result, the credit market has settled on short-term and low-risk loans.
The law has also caused a crowding-out effect where government securities have become a more desirable investment than private sector enterprises.
The controlled environment has also pushed banks to adopt technology and carry out staff and branch rationalisation. In 2017, over 20 banks branches shut down and more than 1,400 bank employees were sacked.
“Following these developments, KBA firmly believes that arbitrary price controls are neither in the best interests of the broader economy nor the households and businesses that the legislature sought to support. [We, therefore,] take this opportunity to call on all stakeholders to chart the best way forward that serves the interest of the economy while promoting financial inclusion and consumer protection,” Olaka said.
Olaka also highlighted that KBA is committed to addressing the problems the public wants to be solved including improving pricing transparency, industry ethics and governance, and promoting enterprise development and SMEs.
The financial sector through KBA had introduced various initiatives like the Cost of Credit Website (www.costofcredit.co.ke) which enables borrowers to compare bank loans and the Inuka SME Capacity Development Program (www.inukasme.co.ke).