This archive report was first published on 11 September 2019.
On September 11, 2019, the Finance and National Planning parliamentary committee rejected a proposal to repeal the interest rate cap, a key provision in the Finance Bill of 2019.
The National Treasury had suggested repealing the rate cap to make credit more accessible to small and medium-sized businesses. However, the parliamentary committee maintained the lending rate cap, which requires commercial banks to provide loans at interest rates not exceeding 4 percent above the central bank rate.
Treasury CS Ukur Yattani argued that the interest rate cap hinders access to finance for Small and Medium Enterprises (SMEs), as commercial lenders shy away from risky borrowers due to the interest rate limit.
Mr. Yattani claimed that since the interest caps were introduced, lending to the government increased, while credit to the private sector decreased. He stated, “Since the interest caps were introduced, lending to the government was increased as credit increased by 2.3 percent up from 19.9 percent while for the private sector, credit reduced by four percent, making it 72.8 percent,”
However, the parliamentary committee, led by Chair Mr. Joseph Limo, opposed the move, arguing that a credit system with no rate caps leaves room for misuse. Mr. Limo suggested segmenting interest rates into high and low rates, with the regulator progressively administering the rates to benefit high-profile lenders and cushion small-income borrowers.
A report by the Kenya Bankers Association shows that the economy suffered a blow from the interest ceiling, with a 1.4% decline in GDP following the move’s impact on the banking sector. The report also highlights a drastic drop in SME lending following the enforcement of the cap.
