Here Are The Effect of Kenyan Interest Rates in the year 2020

By Soko Directory Team / Published February 8, 2020 | 8:00 am



Kenyan Shilling

In a free market, interest rates reflect the price of risk. In the advent of the truly free economy in Kenya when the NARC government took the reins of power in 2003, the banking sector faced a revolution; a disruption triggered by hitherto small players in the banking sector.

The aftermath was an unprecedented uptake of formal banking by individuals and corporates. Some “small banks” signed up so many depositors, that the mainstream banks got into a panic mood. The sector was transformed for life.

The presence of so many bank account holders meant that a broader exposure to risk. Banks had to do business. Their profits jumped from millions to billions. With a bloated loan book also came a big portfolio of non-performing loans. This triggered an increase in interest rates over the years. By September 2016, interest rates on loans averaged 18 percent (Some banks were charging up to 26 percent in the previous few years).

In September 2016, the Banking (Amendment) Act 2015, which capped interest rates at 4 percent above the CBR for interest on loans and 4 percent below the CBR on deposits came into force. The CBR stood at 10 percent, which meant that the ceiling for interest on loans was 14 percent and the floor for interest on deposits was 6%. The government was trying to regulate the banking sector against market forces.

This amendment was celebrated by a sizable number of citizens who had or intended to take up personal loans. Even some business people celebrated it. However, some, including banks protested, and termed it populist. It was just a matter of time before many realized that they could not access these loans from banking institutions.

The players in the banking sector considered that the cap on loan interest was too low a price for the risk a loan to an individual or an SME carries. On the other hand, the government offers risk-free investment opportunities in the form of bonds, bills, and other securities. Banks thus opted to do business with government instead of individuals and SMEs. In September 2016 when the interest cap law came to force, government domestic borrowing was Kshs 1.17 trillion.

In September 2019, the government’s domestic borrowing almost tripled to Kshs 2.7 trillion in just three years. The increase of Kshs 1.6 trillion in a period the government was servicing big loans for infrastructure, and corruption was at its peak meant that a lot of this money did not get to circulation in Kenyan.

The country’s economy was deprived of credit, and only government was able to access it – which is used to service foreign loans and fund corruption – all these led to low liquidity, reduced business transactions, SMEs closing shop, increased unemployment, people not having purchasing power – in turn affecting multi-nationals, profit warnings by large corporations, laying off of staff across every sector, companies losing capitalization and many many other negative impacts.

In the run-up to September 2019, the effects of the interest rates on the economy had hit home and there was disquiet from many quarters. President Kenyatta considered this and send a memo to parliament to rescind the interest rate cap (with some conditions), which got passed.

The banks can now go back to pricing risk and issue loans to individuals and SMEs at risk-adjusted interest rates and do less business with the government. If they play, liquidity will likely improve. Business transactions will increase, SMEs will spring back, people will have higher purchasing power etcetera, and there will be ripple multiplicative effect in the economy which shall be felt by every sector and everyone. If they don’t play, government domestic debt will continue ballooning and the economy will continue accelerating southwards.

READ: Banks Will Now Have Their Way in Setting Interest Rates on Loans

This article has been written by Finance Consultant at Zenuha Augustine Matata.

Get in touch with Augustine via info@zenuha.com




About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

View other posts by Soko Directory Team


More Articles From This Author








Trending Stories










Other Related Articles










SOKO DIRECTORY & FINANCIAL GUIDE



ARCHIVES

2024
  • January 2024 (238)
  • February 2024 (227)
  • March 2024 (190)
  • April 2024 (133)
  • May 2024 (157)
  • June 2024 (145)
  • July 2024 (91)
  • 2023
  • January 2023 (182)
  • February 2023 (203)
  • March 2023 (322)
  • April 2023 (298)
  • May 2023 (268)
  • June 2023 (214)
  • July 2023 (212)
  • August 2023 (257)
  • September 2023 (237)
  • October 2023 (264)
  • November 2023 (286)
  • December 2023 (177)
  • 2022
  • January 2022 (293)
  • February 2022 (329)
  • March 2022 (358)
  • April 2022 (292)
  • May 2022 (271)
  • June 2022 (232)
  • July 2022 (278)
  • August 2022 (253)
  • September 2022 (246)
  • October 2022 (196)
  • November 2022 (232)
  • December 2022 (167)
  • 2021
  • January 2021 (182)
  • February 2021 (227)
  • March 2021 (325)
  • April 2021 (259)
  • May 2021 (285)
  • June 2021 (272)
  • July 2021 (277)
  • August 2021 (232)
  • September 2021 (271)
  • October 2021 (305)
  • November 2021 (364)
  • December 2021 (249)
  • 2020
  • January 2020 (272)
  • February 2020 (310)
  • March 2020 (390)
  • April 2020 (321)
  • May 2020 (335)
  • June 2020 (327)
  • July 2020 (333)
  • August 2020 (276)
  • September 2020 (214)
  • October 2020 (233)
  • November 2020 (242)
  • December 2020 (187)
  • 2019
  • January 2019 (251)
  • February 2019 (215)
  • March 2019 (283)
  • April 2019 (254)
  • May 2019 (269)
  • June 2019 (249)
  • July 2019 (335)
  • August 2019 (293)
  • September 2019 (306)
  • October 2019 (313)
  • November 2019 (362)
  • December 2019 (318)
  • 2018
  • January 2018 (291)
  • February 2018 (213)
  • March 2018 (275)
  • April 2018 (223)
  • May 2018 (235)
  • June 2018 (176)
  • July 2018 (256)
  • August 2018 (247)
  • September 2018 (255)
  • October 2018 (282)
  • November 2018 (282)
  • December 2018 (184)
  • 2017
  • January 2017 (183)
  • February 2017 (194)
  • March 2017 (207)
  • April 2017 (104)
  • May 2017 (169)
  • June 2017 (205)
  • July 2017 (189)
  • August 2017 (195)
  • September 2017 (186)
  • October 2017 (235)
  • November 2017 (253)
  • December 2017 (266)
  • 2016
  • January 2016 (164)
  • February 2016 (165)
  • March 2016 (189)
  • April 2016 (143)
  • May 2016 (245)
  • June 2016 (182)
  • July 2016 (271)
  • August 2016 (247)
  • September 2016 (233)
  • October 2016 (191)
  • November 2016 (243)
  • December 2016 (153)
  • 2015
  • January 2015 (1)
  • February 2015 (4)
  • March 2015 (164)
  • April 2015 (107)
  • May 2015 (116)
  • June 2015 (119)
  • July 2015 (145)
  • August 2015 (157)
  • September 2015 (186)
  • October 2015 (169)
  • November 2015 (173)
  • December 2015 (205)
  • 2014
  • March 2014 (2)
  • 2013
  • March 2013 (10)
  • June 2013 (1)
  • 2012
  • March 2012 (7)
  • April 2012 (15)
  • May 2012 (1)
  • July 2012 (1)
  • August 2012 (4)
  • October 2012 (2)
  • November 2012 (2)
  • December 2012 (1)
  • 2011
    2010
    2009
    2008
    2007
    2006
    2005
    2004
    2003
    2002
    2001
    2000
    1999
    1998
    1997
    1996
    1995
    1994
    1993
    1992
    1991
    1990
    1989
    1988
    1987
    1986
    1985
    1984
    1983
    1982
    1981
    1980
    1979
    1978
    1977
    1976
    1975
    1974
    1973
    1972
    1971
    1970
    1969
    1968
    1967
    1966
    1965
    1964
    1963
    1962
    1961
    1960
    1959
    1958
    1957
    1956
    1955
    1954
    1953
    1952
    1951
    1950