Although Parliament has technically passed the law ending interest rate caps, uncertainty remains whether this will be the magic bullet that unlocks the inertia that has left small businesses struggling to stay afloat.
Getting consistent data on the impact the rate caps that came into force in 2016 have had on small businesses has been difficult. They kicked in when the economy was on a downward spiral due to drought.
In between, there was a pick-up in credit by the private sector, prompting eureka comments from some analysts that the rates were achieving the desired end.
The entry of mobile-based money lending, digital loans, most at usury levels, however opened policymakers to the dearth of credit at the lower end of the market as products such as Fuliza recorded unprecedented success to hit Sh140 billion in nine months.
In his memorandum to Parliament seeking removal of the caps, President Kenyatta said requiring banks to lend at less than 14 per cent and mobilise deposits at about seven per cent had left riskier sections of borrowers at the mercy of shylocks.
But he also took the populist path, arguing that removing the caps means more credit, in a bid to win public support for a reversal, which in ordinary circumstances would have provoked outrage.
But within the industry, it is not certain that broadening the lending margins will yield more private sector borrowing.
The major factor in influencing lending decisions by banks is risk-free government borrowing, whether couched in Treasury Bills or Infrastructure Bonds.
The Treasury Bill has steadied around nine per cent this year while the infrastructure bond is at 12.5 per cent and the retail M-Akiba bond at 10 per cent exclusive of taxes.
With such returns from government papers, many banks have avoided the operational and collection headache tied to private lending especially as they tend to the sub-prime micro, small and medium enterprises (MSME). This segment has traditionally been served by formalised shylocks in the name of microfinance banks, whose rates were at 25-35 per cent pre-rate caps.
These are the ones most likely to gain if the caps are removed, possibly offering secondary lines of credit to mainstream banks that gave credit at between 18 per cent and 25 per cent before the rate caps.
Making the likely outcomes murkier is that many businesses lack bankable proposals. The government could do well to explain the inability of its affirmative, low interest funds to extend credit to the needy business segments. Removing the caps will not unlock significant private sector credit growth until the government curbs its debt appetite and stops holding up suppliers’ payments.