This archive report was first published on 17 November 2019.
Rate Cap: A Bold Experiment That Failed ¶
On November 17, 2019, the rate cap, a law that capped bank interest rates, was repealed after a three-year experiment. The law was introduced in 2016, with the aim of protecting borrowers from high interest rates.
However, the rate cap had unintended consequences, including a surge in government borrowing and a decline in private sector credit. The government took advantage of the lower interest rates to borrow more, while banks preferred to lend to the government due to its lower risk.
As a result, individuals and small businesses found it difficult to access credit, leading to a rise in online lending platforms. These platforms, unregulated by the Central Bank, were able to adjust their interest rates to reflect the risk of borrowers, making them more attractive to those in need of credit.
The repeal of the rate cap has sparked a new experiment in the financial sector, with banks and online lending platforms competing for customers. While banks are yet to celebrate, online platforms are expected to continue innovating and offering competitive rates.
Some have suggested that the online platforms could be turned into virtual banks, increasing competition and driving down interest rates. However, the fallout from the rate cap is still to be seen, and economists and financial analysts are watching and waiting to see how the situation unfolds.
As the writer notes, 'It's still a morning in Kenya's financial sector.' The rate cap may have failed, but it has also provided valuable lessons for the financial sector, and it remains to be seen how the industry will adapt to the new landscape.
- The writer teaches at the University of Nairobi
