In Summary
  • The reasons to uncap interest rates remains unclear if not sinister.
  • The president urges that the cap has presented lending challenges to the Micro, Small and Medium Enterprises (MSMEs).
  • Members of Parliament have vowed to veto the memorandum by President Uhuru Kenyatta requesting that the interest cap rate be removed from the Finance Bill 2019.
  • But perhaps the one place that the members of Parliament can start by remedying these flawed economics of Kenya would be forcing the government to stop mopping local liquidity as it presents close to no risk for commercial banks.

Members of Parliament have vowed to veto the memorandum by President Uhuru Kenyatta requesting that the interest cap rate be removed from the Finance Bill 2019. The president urges that the cap has presented lending challenges to the Micro, Small and Medium Enterprises (MSMEs).

Whereas the House, which has a history of pulling in different directions when the public needs them most, will need a two third majority to overrule the presidential memorandum, the reasons to uncap interest rates remains unclear if not sinister.
The president has argued that it has had negative impact on MSMEs. This may well be true, even if he has not given data to support this argument.

The Central Bank of Kenya (CBK), as the institution that is supposed to stimulate the economy, must find ways to apply social, not just economic indicators, when advising on government financial policies. At the moment it seems that what is in use is the aversion of commercial banks to absorb risk from their core business of lending money.

It is probably logical that the banking sector, which absorbs about 80 percent of lending in the economy, should take a lead in informing economic policy. But, the remaining 20 percent of lending, distributed between SACCOs, Chamas, microfinance institutions and welfare organisations may be where the life of ordinary citizens is centred as far as economic theory and personal finance is concerned.

LOCKED OUT

If the CBK wants to stimulate an economy that is not doing well, it lowers the base rate, which would translate to lowering of interest rates that are set no more than four percent of the CBK rate. But in Kenya this translates to more people being locked out of the so called formal lending, based on the argument that the president is using.

Commercial banks profile customers in sectors and the SME sector is generally considered to be of higher lending risk and are therefore likely to be lent money at rates higher than the 13 percent allowed in law (four percent higher than the nine percent CBK lending rate). The gap between the prescribed risk and the real risk only increases when the base rate is lowered. This makes no sense economically, but merely confirms that Kenya is a ‘peculiar’ country.

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