How Vulnerable is the Kenyan Economy? Interest Rates

Interest Rates


The increase in Interest rates from 5.75% in March 2011 to 18% in December 2011 . This measure came along with increasing the cash reserve ratio from 4.75% to 5.25% over May to November 2011. Both these measures had the effect of squeezing the money supply in the economy in a bid to stem inflation which still remains in the higher teens.

The effects of these measures have been;

• A slowdown in economic growth due to expensive credit in the market. Currently, credit for both corporate entities and individual clients ranges between 20% to 35%
• A shift in investment from listed equities to Fixed income securities due to perceived better returns notwithstanding the fact that election years have traditionally meant poor performance in the stock market.

There has also been hue and cry regarding the egregiousness of spreads between the risk free rate of interest (the CBR rate which is around 18%) and the rate at which banks loan clients currently at around 30%. This has led to a move to curb these rates by parliament the introduction of interest rate caps. This would mean that a bank cannot charge more than a particular percentage over the Central Bank Rate. This has been met with resistance from the Banking fraternity and the treasury who say this is over-regulation and would adversely affect the banking sector.

Both sides of the divide have valid points but the approach has to be balanced. On one hand, capping of interest rates would stifle access to finance due to the fact that only highly creditworthy persons would be able to access loans. The rest would be given a wide berth by the banks. On the other hand, it is unjustifiable that banks continue to make double-digit growth in profit while the economy suffers. There is a sense that they have a disproportionate advantage in comparison with other industries in terms of passing on risk to its clientele. This can only be curbed by increasing competition within the financial services sector to 'force' banks to reduce their margins. This could also be done by encouraging other forms of financing for business via vehicles such as private equity firms, SACCOS and Venture capital funds which would increase choice of financing for entrepreneurs. Also, the CBK can institute regulation capping the portion of capital banks can use for trading securities and currencies so as to skew the capital towards the credit market.