Should interest rates in Kenya be capped?

As the Kenyan National Assembly passed a Bill putting a ceiling on bank interest rates on Wednesday 27, 2016, different institutions are lending their voice to the debate on whether President Uhuru Kenyatta should sign the bill or not. While a report available on the Institute of Certified Public Accountants of Kenya (ICPAK)’s website had recommended that interest rates be capped, the bankers have opposed this move.

As many people debate this matter, most commentators expect the president not to consent to this Bill.

The 2015 ICPAK report concluded that interest rates in Kenya should be capped. The report made a clear case for the need for market intervention citing that the banking industry in Kenya is a classic case of a ‘free market failure’.

The report made comparisons with other jurisdictions. As it noted, interest rates in US, UK, and EU are not capped BUT banks behave as if they are capped and, therefore, rarely go 2 percent above the base rate. The report further noted that the proposal to cap interest rates was in the Original Donde Bill (which also introduced Monetary Policy Committee (MPC)). The Bill had suggested interest rate cap of 4 percent above the base rate and that 70% of the base rate be paid to savers.

“In Kenya it is necessary to cap the Interest rates since the banks cannot self-regulate”, says the report.

The report noted that for 86 years (1906-1992) interest rates in Kenya were capped. During the period, banks made reasonable profits. Then they began making abnormal profits that saw the introduction of Donde Bill in 2000.

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Banks have been accused of charging lenders higher interest rates in Kenya while offering meagre rates on the depositors’ funds. Should this Bill be assented to, analysts expect that banks will stop lending to most small borrowers with high risks as they target large borrowers.

source: tradingeconomics.com

 

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