Interest Rate Floor Removal - "Is it too little, too late?"
• Our 6th topical note titled “Too little but is it too late?” is our analysis of what we believe was a poorly thought out and misinformed move by the Kenyan parliament to remove interest rate limits “floors” on commercial bank deposits as a means of driving private sector credit.
• In our 1st topical note Kenya Interest Rate Caps “End of an error?” we analyzed the impact of interest rate caps on the banking sector, public debt and the overall performance of the economy.
• In a move aimed at reducing the cost of private sector credit, the Kenyan Parliament passed the Banking Amendment Act in September 2016 that effectively capped interest rates charged on loans by commercial banks at 4% points above the benchmark Central Bank Rate (CBR) and a corresponding floor on the deposit rates at 70% of the policy rate.
• Interest rate caps were perceived to be more effective than the Kenya Banker’s Reference Rate (KBRR) that offered a base rate as a benchmark above which banks would price a risk premium.
• The KBRR was largely ineffective as in controlling the cost of credit as banks continued maintained “exorbitant” rates which led the strong push for interest rate controls.
• It is evident that interest rate caps have had the opposite impact with private sector credit shrinking as commercial banks showed a preference for government debt.
• And this was the reason behind the removal of interest rate floors in October 2018, a move whose impact on bank performance and credit to the private sector is analysed in this report.
• Our analysis shows that the move has a positive impact on the profitability of the sector but is largely insignificant in increasing private sector credit.
• We conclude the report with an analysis of proposals to increase private sector credit, the probability of implementation and possible drawbacks of implementation of these proposals. Download Report