1.2 Million SMEs and Households Denied Loans between 2016 and 2017

More than 1.2 million Small Medium Enterprises (SMEs) and households were denied loans from Kenyan banks due to the interest capping law.

According to a report released by Kenya Bankers Association (KBA), the number of loans to SMEs reduced by 1,229,242 between 2016 and 2017.

The report says that the interest capping law has failed its primary objective of making access to funds easier and instead locked out millions of people especially SMEs.

At the same time, the average loan size increased by 47 percent, indicating established and larger companies are finding it easier to access capital at the expense of microenterprises, which form the foundation of the country’s sustainable economic development.

The credit markets witnessed five shocks between 2012 and 2017 and in each event, the markets recovered within three months of the event — with the exception being the rate caps. “If this price control was good for the economy, the credit market would have seen an uptick by January 2017. The fact that credit growth has continued to decline up to 14 months later means the caps are stalling the recovery and thus pulling down our economy,” KBA Chief Executive Officer Dr. Habil Olaka

According to KBA, the operating environment has left banks with little recourse due to heightened sensitivity to risk and rising non-performing loans (NPLs) levels. The credit market has therefore settled on short-term and secured loans. The law has also occasioned a crowding-out effect, with Government securities becoming more attractive investment avenues than private sector enterprises.

While banks had in the past taken up efficiency initiatives enabled by technology, the controlled environment has accelerated the digitization trend and made staff and branch rationalization more compelling.

More than 20 bank branches were closed and more than 1,400 bank staff were laid off during 2017. “Following these developments, KBA firmly believes that arbitrary price controls are neither in the best interests of the broader economy nor the households and businesses that the legislature sought to support. We, therefore, take this opportunity to call on all stakeholders to chart the best way forward that serves the interest of the economy while promoting financial inclusion and consumer protection,” said Olaka