CBK reversal of interest rate cap should not disadvantage borrowers

Central Bank of Kenya governor Patrick Njoroge. Photo: David Njaaga

The August 2016 amendment to the Banking Act to deny banks a free hand in deciding what interest to charge customers on loans was welcome news for many customers. Newspapers were full of stories about Kenyans struggling under heavy debts that accumulated high interest rates as banks basked in the glory of very high profits despite glaring inefficiencies in their business models.

A year down the line, Central Bank of Kenya, which had clearly stated from the onset that switching from market-controlled interest rates would be problematic, has made it open that the cap was only a temporary measure. The latest bank performance has seen the sector’s profitability drop and many banks have reacted by denying many customers loans on account that their risk is higher than the law allows them to cover. Negative credit growth will only serve to slow the economy because it will mean that the private sector is being starved of money to expand.