This archive report was first published on 29 October 2019.
On October 29, 2019, Moody's Investors Service predicted that repealing interest rate caps in Kenya would have a positive impact on the country's credit sector.
The credit rating agency suggested that the repeals would lead to a higher private sector credit growth and overall economic growth, as higher lending rates would boost banks' profits to levels similar to pre-cap periods.
While the fate of the Finance Bill of 2019 hung in the balance, it was likely that the parliament would repeal interest caps, rather than override the president's veto by a two-thirds vote in the National Assembly.
Repealing the interest rate cap would no longer limit banks' lending, providing a credit positive environment in the country.
Moody's predicted that revising the interest rate caps would provoke higher lending rates for SMEs over the next 12-18 months, and would also stabilize banks' non-performing loans and eventually decline the NPL ratio.
While Moody's was hopeful that repealing the rate cap would improve interest income in banks, it was hard to expect results similar to those in 2016, before the rate caps.
However, interest rate cap repeals would sure reverse the trend of lending in banks, with Moody's anticipating that the move would improve banks' preference towards SMEs lending over government and corporate borrowers.
Between 2016 and 2019, banks shifted credit from the private to the government sector, with private sector credit growing by less than 5% in 2017 and 2018 and 6% in June 2019, compared to a 19% investment in government securities in 2018 alone.
