CBK Governor: Interest rates caps need review

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Central Bank of Kenya (CBK) Governor Patrick Njoroge has agreed that the decision to cap interest rates needs urgent appraisal. Njoroge said yesterday CBK had held numerous discussions on capping of lending rates and that “we need to deal with interest rates, but the solution is not the right one”.

“We still believe that the rate caps will be more detrimental,” he said without stating the impact the capping has had on the economy, adding that CBK wants to ensure that loans are appropriately priced to help Kenyans.

CBK is studying the impact of caps on the economy in what is expected to have a bearing on policies related to interest rates. Speaking at the Kenya Trade Week Expo at the Kenyatta International Convention Centre, Njoroge said there is need to “fix the system” and at the same time allow banks to be more customer centric.

“Banks need to change their pricing models,” he said, adding that we are working towards ensuring people get appropriately priced loans. Treasury Economic Secretary Geoffrey Mwau had hinted at the same venue a day earlier, of a possible review on capping of interest rates to enable easy access to credit.

Speaking at a forum, which was discussing credit crunch and struggling retail sector, Mwau said the rate caps had been implemented despite some difficulties posed. He said the government was closely monitoring the difficulties, while accelerating other reform measures to reduce the cost of credit.

“Now that we have the feedback from the banking sector, traders and even SMEs, it can be used to make the right kind of adjustments,” Mwau said. The Banking Act (Amendment) Bill, 2015 capped interest rates — at four percentage points above the Central Bank Rate (CBR) — in a bid to ease the cost of lending and help more people access loans at an affordable rate.

The prevailing CBR is 10 per cent, meaning loans are capped at 14 per cent. When the Bill was assented to by President Uhuru Kenya in August last year, banks slowed down lending to customers perceived to be risky arguing they were reviewing their business models.

CBK’s Monetary Policy Committee (MPC) most recent report indicates the number of loan applications increased by 23.4 per cent between August 2016 and April 2017.

Although the number of loan approvals also increased by 35.7 per cent, the value decreased by 16.3 per cent. In that period, the MPC noted that banks’ lending to Micro, Small and Medium Enterprises fell by an estimated 5.7 per cent between August 2016 and April 2017.

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