Rates Capping Poses Risk to Kenya’s Financial Stability -IMF

Sustained capping of commercial banks’ lending rates at 4 percentage points above the Central Bank of Kenya benchmark rate ‘if maintained, they could potentially pose a risk to financial stability,’ International Monetary Fund (IMF) has warned.

This is the latest red flag raised by IMF after President Uhuru Kenyatta assented into law the Banking (Amendment) Bill, 2015.

According to IMF, “It is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector.”

““The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth. They also complicate monetary policy and adversely affect banking sector profitability, especially for small banks,” warns IMF.

In September, the CBK Governor also noted indicated that with the law coming into force it had complicated the conduct of the Monetary Policy Committee (MPC).

“Existing borrowers will benefit, but what happens to the risker borrowers at the margin? They may be cut off from lending. It’s unclear which way this will go. We haven’t done it before,” he told the media.

IMF was responding after the Executive Board of the International Monetary Fund (IMF) completed the first review of Kenya’s performance under the program supported by the Stand-By Arrangement (SBA) and an Arrangement under the Standby Credit Facility (SCF). The 24-month SBA/SCF with a combined total access of SDR 1.06 billion (about US$1.5 billion) was approved by the IMF’s Executive Board on March 14, 2016.

Last year the private sector credit growth was on a free-fall for 16 consecutive months, coming in at 4.6 percent in October 2016 from a high of 21.0 percent in August 2015 due to reforms in the banking sector brought about by the increase in Non-Performing Loans (NPLs), which prompted banks to reassess their risk assessment framework, preferring to lend to the government as it is risk free as opposed to the private sector, which is considered riskier.

Analysts had noted that the trend was likely to persist in 2017 as a result of the enactment of the Banking (Amendment) Act, 2015.

“This is because it will be difficult for commercial banks to fit SMEs and subprime borrowers in the current pricing framework that is capped at 4.0 percent above the Central Bank Rate (CBR). The expected downward trend in growth in private sector credit will have a negative effect on the contribution by the private sector to GDP growth in 2017,” notes Cytonn Investments.

CBK will hold its next Monetary Policy Committee meeting on Jan. 30 to set its benchmark lending rate.

The current rate is 10.0 percent as set in November.

Related: State Of The Economy:Number of Jobs Lost in the Banking Sector in Kenya