Capping bank interest rates could have ‘undesirable’ impact on economy, experts warn

 

Capping the interest rates offered by banks could have a detrimental effect on the country’s economy, experts have said. With less than one week for the President to decide the fate of a new law seeking to lower interest rates, the Banking (Amendment) Bill, 2015 continues to draw divergent opinions from all sector of the economy.

Elizabeth Nkukuu, Chief Investments Officer for Cytonn Investments has warned that capping the interest rates offered by banks would have an undesirable impact on the country’s economy.

In an exclusive interview, Nkukuu said big banks, which have a wider spread in terms of total loans and deposits will avoid lending to Small and Medium Enterprises (SMEs) at a lower rate, a move she insists is bad for the economy.

“The consequence of capping interest rates will be dire, especially to Small and Medium Enterprises because banks might be forced to not extend loan facilities to them yet this sector is essential to our economy,” she said.

“We need to separate politics and our economy. The bill might be popular, but it’s not healthy for our economy. We should find other means of ensuring the lower consumer access lower interest rates but not through capping bank rates,” she added.

Nkukuu stated that with the liberalized financial sector, market forces should be allowed to control the industry. The Investments Officer ascertains that liberalization in the banking sector has been a success so far and she warned that introducing new laws aimed at capping market rates might at the end erode the benefits of liberalization in the financial sector.

The Bill’s detractors have voiced concerns that capping interest rates would reduce investors’ appetite towards Kenyans banking sector, a move that might negatively impact the economy.

The Bill, sponsored by Kiambu town MP Jude Njomo, proposes a cap on loans at no more than 4 per cent of the Central Bank of Kenya’s recommended rates.

“The Bill proposes to put a cap on the rate of interest charged for loans and to fix the minimum rates of interest that such institutions must pay to deposits held,” reads the Bill by Hon Njomo.

Commercial banks, through the Kenya Bankers Association, have unanimously objected to the Bill, noting that it will disadvantage the very consumers it seeks to protect.

Recently, banks promised to set aside Sh30 billion for Small and Medium Enterprises (SMEs) in the country as one way of supporting the sector, which the Bill intends to protect. At the same time, banks have promised to lower their interest rates as per market needs.

The President is in a tight spot as he tries to balance both political and economic interests bearing in mind that one of the Jubilee manifestos was to ensure Kenyans get lower interest rates.

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