This archive report was first published on 12 November 2019.
As we enter 2020, there are signs that Kenya's economy may be poised for a turnaround. The ongoing rains have started well, and if we get a good season, rain-fed agriculture will receive a much-needed boost, giving the economy a fillip.
Another significant factor that could contribute to economic growth is the freeing up of the credit market from the interest rate cap regime. This has been a major constraint on economic activity in recent years, with the business of lending and borrowing being a massive commercial activity that provides the grease and oil to the wheels of commerce.
However, the interest rate cap regime has had several negative effects. It has restricted credit to sectors such as small and medium enterprises, manufacturing, construction, and many households, resulting in these areas operating well below capacity or even closing down. This has led to a reduction in economic growth, with at least 1.4 per cent of economic growth being lost in 2017 alone.
The rate cap regime has also created distortions, such as driving credit from the private to the public sector. In recent years, banks have lent more and more money to the government through Treasury Bills, where they get a reasonable return on it. This has crowded out the private sector and thrown money at a government that should be doing more to tame its borrowing appetite.
Furthermore, the rate cap regime has restricted the Central Bank of Kenya in carrying out its primary function of prudently managing monetary policy. It has also spawned a rise in very expensive predatory informal lending, which is self-defeating since the whole concept was to allow more people to access cheaper credit.
With the removal of the interest rate caps, it is expected that credit access and growth will be restored, and resultant economic activity will surge. While there may be concerns about the return of expensive loans, competition in the banking and lending sectors has intensified significantly, and there is a lot of spare lending capacity. The able CBK governor would use the relevant monetary mechanisms to tame any hint of excessive lending.
