March 21, 2018 / 12:15 PM / a month ago

Kenya rate cap sliced 0.4 percentage points from 2017 growth -cenbank

NAIROBI, March 21 (Reuters) - Kenya’s cap on commercial interest rates probably cut last year’s estimated economic growth rate by 0.4 percentage points because it throttles credit to small and medium businesses, the central bank said.

In an attempt to limit the cost of borrowing faced by businesses and individuals, Kenya capped commercial lending rates in September 2016 at 4 percentage points above the central bank’s benchmark rate, which now stands at 9.5 percent.

The central bank said in a draft study on the impact of the cap that it had especially hit micro, small and medium enterprises (MSMEs), which were unable to benefit from the cap because banks deemed them too risky.

“Those individuals with credit risk above the capped rate will be shunned by banks, thereby leading to contraction in growth of credit to the private sector,” the bank said in the study released on Tuesday.

The government estimates the economy expanded by 4.8 percent last year, down from 5.8 percent in 2016, as it grappled with the impact of drought, a presidential election and the drop in private sector credit.

Economic growth will bounce back to 5.8 percent this year, the Treasury said.

The government had said when it introduced the policy that banks were making high returns without benefiting customers. But the central bank, bankers and economists had said the policy would stifle the lending needed to spur on the economy.

“The interest rate cap infringes on the independence of the central bank and complicates the conduct of monetary policy. It is found that, under the interest rate-capping environment, monetary policy produces perverse outcomes,” the study said.

The bank defined perverse outcomes as situations where, instead of increasing credit to the private sector, lower lending rates led to a decline in credit expansion.

With the International Monetary Fund putting pressure on Kenya to drop or modify the lending cap, Finance Minister Henry Rotich said last week that it was unsustainable and the government was planning modifications. (Reporting by George Obulutsa Editing by Duncan Miriri Editing by David Goodman)

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