Interest rates capping law needs urgent change to reverse decline

One of President Uhuru Kenyatta’s more controversial legacies is his assent to the Banking Amendment Act of 2016, introducing caps on interest rates.

Touted as being a move to make credit more accessible and cheaper for the “common man” it has had the irony of doing the exact opposite. In effect, it has worked against the very people who were supposed to benefit and against the whole country and the economy.

As Central Bank Governor Patrick Njoroge said recently, the legislation “is quite damaging to our economy and people… the people we expected to help, including small businesses, are the ones being damaged”.

If anything, Dr Njoroge was being polite at the carnage and turmoil that has followed. As it is, the economy has been hit by some bad turbulence such as one of the worst droughts for years. The run-up to this year’s elections is also causing many to adopt a wait-and-see approach, which is understandable.

But without doubt the rate capping legislation has further dented our economic activity and progress. Lending and borrowing is one of the crucial cogs of any economic and commercial activity.

POTENTIAL DAMAGE

A more candid assessment of potential damage by the IMF estimates that the legislation could cut two per cent off economic growth. Bearing in mind we struggled to get to the six per cent mark last year, this could knock us back to the four per cent league.

Within reason, the more accessible and affordable credit becomes the more the wheels of commercial and economic activity are vitally oiled and the momentum is kept up.

But the crucial question is how all that was to be remedied so that the formal and informal banking sector could become a more accessible and affordable dynamo of the economy.

It is ironic that an economy that is embedded in private enterprise and entrepreneurial drive should be subjected to such shackles. One of Dr Njoroge’s answers was to reinforce the basic tenets of prudential monetary and fiscal management and stability.

This involved getting money supply under tight control; cajoling central and county governments to work more within their means and moderating inflationary pressures and tendencies.

EXTRA MONEY

This often entails the CBK saying no to requests for extra money from any part of government. True, the banking sector has had some deserved criticism over the profits it was making. But wasn’t the answer to create a more competitive environment rather than impose controls that have undone many an economy over the years?

Private sector credit growth has dropped from 20 per cent in September 2015, to 16 per cent in March 2016 and four per cent in September 2016 when the law came into effect.

There has been a dramatic decline in credit in key sectors such as household; trade and manufacturing and construction. It is not just a question of a decline in credit.

Many private sector entities have been subjected to more stringent credit conditions. One result of this is the rise of informal lending through saccos and other means. In short, what the legislation did was introduce distortions and impediments into the market.

SAFE HAVENS

Conversely, banks have tended to resort to safe havens such a government securities and bonds where the return is guaranteed and very respectable.

Ironically, much of that money could have been lent to small and medium enterprises if the environment was more hospitable. What is clear is that the banking law must be amended to broaden the rate range so that it becomes a framework rather than a series of controls and handbrakes.

There is a need to address some of the other inefficiencies and costs. Conveyancing and loan documentation are two of the most obvious. This is quite a challenge because it involves creating greater efficiencies in other departments such as the Lands registry and, of course, providing a framework for a more competitive environment.

Robert Shaw is a public policy and economic analyst:[email protected]