Central Bank of Kenya opposes capping interest rates

Central Bank of Kenya (CBK) has opposed the National Assembly’s move to capping interest rates warning that it will raise the cost of doing business.

“We continue to express concern on the adverse consequences of capping interest rates. This would include, inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission,” a statement from CBK reads.

Habil Olaka, chief executive officer of the Kenya Bankers Association, said the industry body opposed both amendments.

“It is only those borrowers who fit within that risk profile that is legislated in the law that will then be accessible to credit,” he told media briefing. Borrowers whose risk profile is higher than what is legislated will have to get credit elsewhere. “

Going forward, CBK said it will continue to work with the National Assembly, the Government, the banking industry, and other stakeholders, to find an appropriate solution that sustainably reduces the cost of credit.

Read: Central Bank Asks Parliament for Time to Compel Banks to Lower Interest Rates

In May, Kenya Association of Manufacturers CEO Phyllis Wakiaga said capping interest rates at 4 percent could curb the flow of funds to the industrial sector as Banks would resort to lending only to the government and AAA accredited institutions, leaving out SMEs and other borrowers in the cold.

“Financial constraints are some of the reasons companies are unable to grow as they would wish to. It is also the key reason why many cottage industries are unable to transition to formal companies. The hardest hit would be small industries that want to unfurl into fully fledged companies which are the future of this economy.”

On Wednesday, the National Assembly passed the Banking (Amendment) Bill, 2015, in its Third Reading to cap commercial banks’ lending rates at 4 percentage points above the central bank’s benchmark rate whose benchmark lending rate is now 10.50 percent.

The bill was sponsored by Jude Njomo Mp, Kiambu Central.