IMF now kicks up storm with calls for scrapping of rate-capping law
By Dominic Omondi | January 27th 2017
The International Monetary Fund (IMF) wants the law capping interest rates abolished to stimulate growth.
In a controversial statement that is likely to rekindle the debate that preceded the passage of the Banking (Amendment) Act 2016, IMF claimed interest rate controls are likely to curtail growth.
“Although the adverse effects of the controls are manageable in the near-term, if maintained, they could potentially pose a risk to financial stability. Therefore, it is essential to remove these controls while taking steps to prevent predatory lending and increase competition and transparency of the banking sector,” said Deputy Managing Director and Acting Chair of IMF’s Executive Board Tao Zhang in a statement Thursday.
Mr Zhang said although the overall macroeconomic outlook is positive, with the country experiencing robust growth and reduced external imbalances, interest rate controls are likely to reduce access to credit, weighing on growth.
The IMF’s Executive Board has completed the first review of Kenya’s performance under a programme supported by the Standby Arrangement (SBA) and an Arrangement under the Standby Credit Facility (SCF).
The 24-month SBA/SCF with a combined total access of about $1.5 billion (Sh155.5 billion) was approved by the IMF’s Executive Board on March 14, last year.
The effects of the Banking (Amendment) Act 2016, which was signed into law in September, are yet to be known. However, there have been indications that banks have started cherry-picking borrowers as a safeguard against risky borrowers.
Data from the Central Bank of Kenya (CBK) showed that while loan applications increased dramatically following the enactment of the law, lenders did not approve most of them.
CBK, however, denies suppressed loan approvals are linked to the interest rate capping regime.
“We have been monitoring and we have not got conclusive evidence. The sense is that lending has been curtailed to some sectors that were getting loans at much higher rates. In that sense, it is still not conclusive because banks are trying to accelerate their SME lending. We need to look at the data carefully,” CBK Governor Patrick Njoroge was quoted as saying by Bloomberg about interest rate capping.
Thursday, Kiambu MP Jude Njomo, the sponsor of the Banking (Amendment) Bill, 2015 that was eventually passed by Parliament, dismissed the global lender’s sentiments.
“The CBK does not consult IMF while making laws. IMF may not be happy with the capping as it is not benefiting its masters, but Kenyans are very happy with the capping,” said Mr Njomo without elaborating on who “IMF’s masters” are.
Banks have been restructuring their business models, with most of them being forced to lay off in droves as they turn to automation and digitisation. IMF said interest rate capping complicates monetary policy and adversely affects banking sector profitability, especially for small banks.
Both Treasury and Central Bank opposed the law in its infancy, but were forced to play ball when President Uhuru Kenyatta signed it.
The law was received well by Kenyans who felt that banks were getting “abnormal” profits by charging high interest rates. “These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns,” said President Kenyatta when he signed the bill into law.
IMF’s push for the repeal of the populist law may not be received well, coming at a time when political temperatures are high as the country gears up for August’s elections.
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