Fact-checker: MPs right on Government's cut on liquidity

In the Finance Bill 2019, the National Treasury has proposed repealing the Banking Amendments Act (2016) that introduced caps on lending rates as one of the means of stimulating liquidity in the economy. The National Treasury is responding to reports by commercial banks that blame a 15 per cent drop in credit access over the past four years, on the interest caps.

However, this has been challenged by Members of Parliament with the Budget and Appropriations Committee Chairman Kimani Ichungw’a pointing out that bankers’ explanation of lack of liquidity in the economy is incomplete.

“We have been told by the banking industry that we are not getting credit in the private sector because of the interest rate caps,” he said last week at the launch of the 2019/2020 budget-making process.

“Partially yes, but to a greater extent it is not the capping of interest rates in my opinion,” he explained. “The Cabinet Secretary for National Treasury bears the greatest responsibility in terms of getting credit to the private sector in the form of government borrowing and if we are to deal with access to credit and increase liquidity, the government has to control its appetite for borrowing.”

This is accurate. According to the latest Central Bank of Kenya’s (CBK) Credit Survey for the quarter ended March 2019, all factors affecting demand for credit did not have a significant impact on private sector’s overall demand.

More than half of businesses surveyed across all sectors reported aspects such as availability of internal financing, loans from other banks, cost of borrowing and the Central Bank Rate (CBR) remained unchanged. “Investment in government securities, competition from Saccos, microfinance banks and other credit providers, retention of CBR at nine per cent and competition from other banks are the major factors that made the commercial banks exercise caution in extending credit facilities,” said the CBK.

At the same time, 82 per cent of the respondents stated that interest capping will have little or no impact on the demand for credit. “Interest rate capping has compelled banks to increase their risk mitigation measures,” explained the CBK. “As a result, credit standards have been tightened which led to reduced credit facilities granted to SMEs. Most banks opted to invest in government securities which are deemed less risky as compared to SMEs.”

Banks have thus opted to stack their bets on government debt to shore up revenues. They have at the same time upped fees and commissions to compensate for the loss in interest income and are using the interest rate caps as a scapegoat.