CBK Pushes for Scrapping of Cap Rate Law to Ease SME Credit Access

The Central Bank of Kenya (CBK), in a bid to ease the limited access to credit by small and medium-sized businesses, has revived its push for the scrapping of controls on the cost of loans, claiming that the interest cap rate law in practice is costing the economy.

CBK Governor and Monetary Policy Committee (MPC) Chair, Patrick Njoroge said Tuesday that there is a probable soft spot in the current economy, and it concerns the drivers of the country’s growth.

“This concerns the micro small and medium enterprises (MSMEs). MSMEs are at the bottom of the pyramid. The MSMEs is where the employment is,” he said to journalists on Monday’s MPC meeting.

“There are lots of small institutions that have substantial growth potential. Traders in several markets across the country including Gikomba, Muthurwa in Nairobi, in Kongowea in Mombasa, the mechanics in Ogopa Lane in Kariokor, traders in Kondele in Kisumu or even furniture makers on Ngong Road all contribute greatly to our country’s GDP,” added Dr. Njoroge.

“But how can they expand their businesses? Finance is part of the answer. In a sense in 2019 we need to deal with (the rate cap) otherwise it can be a drag on the economy. This is the business we need to deal within the next few weeks, in the next few months,” he continued.

The move to cap the cost of loans at 4 percent above the CBK’s rate in a bid to lower borrowing costs for businesses and individuals made banks think twice about giving SMEs loans due to complicated risk assessment.

The law did the exact opposite of what was intended. Although it was for a good course, lenders claimed that lending to SMEs and individuals offered no accurate risk assessment. Since then, the majority of SMEs have remained stagnant without growing for inadequate and lack of capital for growth and expansion.

Meanwhile, data from the CBK indicates that the private sector grew by 2.4 percent in a year to December 2018 compared to 3 percent registered in November.

However, to support the growth of the GDP, the credit growth remained consistently below CBK’s target rate of 12 to 15 percent.

READ MORE: Kenya’s GDP Projected to Grow to 6.1 % in 2019