How to make interest capping successful

The Central Bank of Kenya and the government must think through certain policies to make interest control a success so that the ghost of interest capping experienced in the US in the 1980s, commonly referred to as S &L crisis, does not slay us.

The lending rate capped at 4 per cent on the CBK rate depends on the inflation rate. If the government allows inflation to rise rapidly, then it means CBK must increase the base rate to mop up the excess money in circulation.

This also means commercial banks would have to adjust their lending rates, leading to expensive loans and negating the spirit of the interest capping law. The government must forecast future inflation with precision and find ways to keep it low.

Kenya has made strides towards credit referencing, with three credit reference bureaus licensed by CBK to aid in credit information sharing.

Banks usually ask questions that require “no” or “yes” answers to determine a client’s credit rating. Some people have found themselves blacklisted at the bureaus for as little as Sh100 loan default.

The result is that a financially stable client who could be financing a mortgage worth millions of shillings is denied a new loan. Banks should ask additional questions about a borrower’s past credit standing. Banks should also allow borrowers with good credit ratings to enjoy low interest on loans.

The goal of regulation is to enable entrepreneurs to enjoy low interest on business loans so as to take advantage of investment opportunities. It makes no sense to make loans cheap if people cannot use them for entrepreneurship.

I know of youths who took loans but since they lacked financial literacy skills their investments went down the drain and they are now paying loans that did not improve their lives.

FINANCIAL LITERACY

Financial literacy should start from school and continue with the government supporting financial literacy programmes.

The Kenyan banking sector has 43 commercial banks, but the truth of the matter is we have just seven banks controlling about 60 per cent of the market.

Kenyan banks rely on deposits to finance loans. The bigger banks with a good reputation are in a better position to attract deposits, hence they can offer more loans.

My view is that the small banks will struggle even more with this interest capping law. The Central Bank needs to encourage the smaller banks to consolidate to improve their competitiveness and even cheaper loans. The CBK can achieve this through increasing minimum capital requirement.

The pride of any country is to have a stable currency. The strength of the domestic currency depends much on the participation of the country in global trade and ability to attract foreign capital.

Kenya has done relatively well in recent times in attracting the world’s attention by hosting important global conferences. The government must translate this attention into real foreign capital injection into the economy. This should improve investment in all sectors.

The import of this is to strengthen the Kenyan shilling. A stronger currency allows the CBK to lower the base lending rate to enable citizens to enjoy cheap loans.

Kenya has gained recognition on the success of its mobile money model. This platform is a unique resource that must be harnessed for economic transformation, just like tourism and tea.

Kenyan youth are active on the social media platform. Commercial Banks must move away from the traditional banking hall and make their presence felt on the digital platform by leveraging on technology to offer more loans through mobile lending while taking advantage of the security provided by social media platforms such as Facebook and Twitter.

The Central Bank should strengthen and regulate mobile lending to ensure that borrowers and lenders are protected.

Mr Obuya is a consultant with Radiant Consulting and Event Management. [email protected]