IMF now kicks up storm with calls for scrapping of rate-capping law

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 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.

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