Repealing interest rate cap will slow down economy

Tuesday, September 17th, 2019 00:00 |
Loan. Photo/Courtesy

Bernard Kimani

For some time now, commercial banks in Kenya have been pushing  for the repeal of the law capping lending rates.

Before the law was enacted, Kenyans witnessed commercial banks increase base lending rates to punitive levels in the range of 24 to 30 per cent. 

The law was meant to make credit affordable and accessible, especially to Small and medium enterprises (SMEs).

Repealing this law, therefore, would be counter-productive and have a negative impact on businesses.

Increased interest rates will eat into businesses’ revenues and thus affect their short-term and long-term targets.

Such a scenario would be so serious that some businesses may have to implement cost-cutting measures such as staff lay-off in order to service bank loans. 

Such a scenario would, definitely, have an overall multiplier effect on the economy and slow down its performance. Loss of jobs and decline in economic growth will lead to untold suffering for Kenyans.

While agitating for repeal of the interest law, banks argued that the move would allow them to start lending to small businesses.

Currently, the banks are barely lending to small businesses and individuals, citing high risks. 

Indeed, according to Central Bank of Kenya, the current situation has resulted in a major slowdown in the productive sectors of the economy, with many start-up businesses forced to  either scaled down their operations or shut down. 

But bankers hold a different view; they claim the interest law discourages them from lending to borrowers with a significant risk of defaulting.

However, the arguments do not exhaustively address the need to repeal the law given that Credit Reference Bureaus help banks in determining a borrower’s credit worthiness.

Further, the banks’ argument is still not convincing because they continue to make huge profits even with the rate cap in force. 

Indeed, the low interest rates leads to many things that significantly impact positively on the business community and generally all Kenyans.

This should be maintained if we are to spur economic growth. When loans become cheap and readily accessible, many ordinary business people are able to get the much-needed finance to grow their businesses with or without the traditional collateral. 

This will lead to rapid economic growth and high liquidity in the market. This growth will of course put constraints on social infrastructure and amenities, thus the need to expand the same in tandem. 

Further, such liquidity brings about high inflation and thus the need for the CBK to manage such a challenge. - The writer is a Communication Specialist and a Certified Public Relations Analyst 

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