The International Monetary Fund (IMF) on Thursday asked the Treasury to remove bank interest rate caps, giving Kenyan banks support in their war against the controls.
It said the controls posed a risk to financial stability in East Africa’s biggest economy and that they had slowed its leadership in the journey to financial inclusion.
The fund’s deputy managing director Tao Zhang said in a statement that the rate cap had reduced access to credit and ultimately economic growth.
Parliament passed the law capping interest rates in August year despite a spirited attempt by banks, Treasury and the Central Bank to stop it.
The IMF had also warned against the caps but this is the first time it has explicitly called for their removal.
“The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth,” the Washington-based global financial institution said, adding that the caps had also complicated monetary policy and threatened the survival of small banks.
It said although the adverse effects of the controls are manageable in the near term, it poses a risk to Kenya’s financial stability if allowed to persist in the long term.
“Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency in banking,” Mr Tao said.
The statement was released after the IMF’s executive board completed the first review of Kenya’s performance under the stand-by support programme valued at Sh150 billion.
Banks have maintained their opposition to the law, which limits interest on loans at four percentage points above the Central Bank Rate (CBR).
Kenya Bankers Association chief executive Habil Olaka said capping the cost of loans had sapped energy from banks, slowing down growth as the fourth quarter 2016 financial results expected to be released next month would show.
Mr Olaka said banks were optimistic that once the full effect of the law became clear, the push to have it revised would gain momentum.
“When the impact on the economy becomes clear, then there will be a compelling reason to show all stakeholders that this is not just a banking sector issue but one that affects the wider economy,” he said.