NAIROBI, May 11 (Xinhua) -- Kenya's interest rate capping law that was put in place in 2016 has reduced the access to loans for Small and Medium Enterprises (SMEs), the banking industry lobby said on Friday.
Habil Olaka, the CEO of the Kenya Bankers Association (KBA), told a media briefing in Nairobi that while the law was well-intentioned, it has failed to achieve its key objective of increasing credit uptake by households and micro and small enterprises.
"There is a clear indication that the law has not succeeded in increasing access to loans to the low cadre of the economy, but rather created conditions that favor the upper end of the economy," Olaka said when KBA released its third report on the impact of the interest capping law which restricts banks to price loans at four percent above the Central Bank Rate.
The report is among a series of KBA survey that have shown a consistent trend of adverse effects occasioned by the Banking (Amendment) Act that was introduced by parliament in the third quarter of 2016.
Olaka said contrary to its spirit, the law has significantly stifled access to capital with the number of loan accounts reducing by 1.2 million accounts between 2016 and 2017.
He added that interest rate capping has contributed to the continued decline in the growth of credit to the private sector by introducing a distortion in the market which the credit markets have not been able to recover from.
According to the banking lobby, the credit market has witnessed five shocks between 2012 and 2017 and in each event the markets have recovered within three months of the event with the exception being after the introduction of the interest rate caps.
"If this price control was good for the economy, the credit market would have seen an uptick by January 2017. The fact that credit growth has continued to decline up to 14 months later means the caps are stalling the recovery and thus pulling down our economy," Olaka said.
The CEO added that the notion that the lower cost of credit would lead to the reversal of the declining rate of growth has been disapproved beyond all doubt.
Jared Osoro, KBA Director of Research and Policy said that the introduction of interest rate caps has seen the average loan size increase by 47 percent, indicating that established and larger companies are finding it easier to access capital at the expense of micro enterprise, which form the foundation of the country's sustainable economic development.
Osoro noted that the operating environment has left banks with little recourse other than to limit credit to the small scale borrowers due to heightened sensitivity to risk of rising non-performing loans levels.
He added that the law has occasioned a crowding-out effect, with the government securities becoming more attractive investment avenues than private sector enterprises.
According to KBA, while banks had in the past taken up efficiency initiatives enabled by technology, the controlled environment has accelerated the digitization trend and made staff and branch rationalization more compelling.
"More than 20 bank branches were closed and more than 1,400 bank staff were laid off during 2017," he said.
