The cap on interest rates is meant to help small traders access credit but instead it is strangling the economy
Kenya might be unable to sustain its economic growth rate of about 6% a year due to poor credit growth caused by a cap on commercial lending rates, the CEO of Equity Group said on Monday.
East Africa’s richest economy capped the rates at four percentage points above the central bank rate in 2016, with authorities saying they want to help small traders access capital at affordable rates.
But the move has had the opposite effect. The central bank governor said in September the cap is strangling the economy and banks say they cannot properly price risk to small and medium enterprises (SMEs) while the cap is in place.That has sent annual private sector credit growth tumbling to 4% from double digits before the cap, prompting the warning by Equity, which is one of the top lenders.
“There is no way you can grow an economy at 6% and you are funding it at a growth rate of 4%,” James Mwangi, Equity Group’s CEO, said at an investor briefing. An attempt by finance minister Henry Rotich to repeal the cap in June to boost credit growth was blocked by legislators on the grounds that banks would not regulate themselves to offer lower rates to consumers.
Equity posted an 8% rise in pretax profit for the nine months to the end of September as interest income
grew and profit from its regional businesses like in the Democratic Republic of Congo grew at a faster pace.
The lender, which also operates in Uganda, Tanzania, South Sudan and Rwanda, said profit rose to 22.4-billion shillings ($221m) from 20.7-billion a year earlier, while interest income rose 9% to 38.5-billion shillings. The regional businesses contributed 18% of profit for the period, from the previous year’s 14%, the lender said. Its total bad debts jumped to 8.7%, from 7.4% a year earlier,
Equity said without providing details. The bad debts were, however, significantly below the sector average of nearly 13%. Equity’s shares rose 1.27% in Nairobi after the results.