The Central Bank of Kenya (CBK) has developed new rules that are set to compel Banks to lend SMEs amid their fears of giving out cash for business purposes due to the prevailing interest rate cap introduced in August 2016. These rules are contained in the Kenya Banking Sector Charter of the Central Bank that came into effect on March 1st 2019. Dr. Njoroge, the current CBK governor has been quoted warning the Banks of administrative sanctions contained under Section 49 of the Banking Act.
The Governor believes that the Banks will adhere to these measures or risk a jail term of up to two years or a maximum of Shs. 100,000 fine for concerned officials, the top cream not being spared either. Speaking to the media during last week’s Monetary Policy Committee (MPC) meeting, Dr. Njoroge said that he believes that this will in turn benefit the Kenyan credit consumers.
Since its introduction towards the last quarter of 2016, the interest rate cap has negatively affected the credit market as anticipated by economists during its debut. In figures, despite CBK’s target rate of 12% through to 15% required for economic development, the Private Sector Credit grew by a mere 3.4% in the last twelve months as at February 2019.
As an alternative, Banks have switched to lending big companies and government rather than individuals and small businesses. As they say numbers don’t lie, the latter has benefited to a tune of Shs. 700 billion from the top tier banks in the country. These include Standard Chartered, Barclays, KCB, Equity, Cooperative, Diamond Trust and Stanbic Banks whose loan books grew at a slower pace of 3.6%.
Dr. Njoroge, the current CBK Governor has been on the push against the interest rate cap law terming it as an economic growth drag. He confirmed that the MPC was in agreement that the interest rate cap constrains the country’s monetary policy by hampering access to credit for the micro small and medium enterprises (MSMEs). This law has recently been declared unconstitutional by the High Court, with a timeline of a year given to the parliament to amend the law. See this article for more on the High Court ruling.
