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Is capping the rates crushing the Kenyan formal banking sector?

From all the latest indications, the decision of Kenyan government to peg interest rates to stimulate borrowing might have an unsuspecting downturn for formal banking sector.

In its latest warning issued by the Central Bank of Kenya (CBK) after the adoption of the rate capping bill, Dr. Patrick Njoroge stated that: “It’s not that this is the necessary outcome but what is clear is we have people in the margin and if the caps down because of the action of Monetary Policy Committee, those risky borrowers at the margin maybe cut off from lending.”

“This affirms a position held by the Kenya Bankers Association (KBA) that capping interest rates may not be beneficial to individual borrowers. According to KBA, 40 percent of personal loan borrowers are considered moderate, high and very high risk clients and are unlikely to benefit from interest rate caps. Customers have expressed fears that banks may reintroduce charges and levies in a bid to keep money trickling into the bank.”

As banks – your typical brick & mortar finance institutions – exasperate figuring out how to cover the cost of their expensive branch-office operations, while having to reduce the interest to meet the regulation, non-traditional lenders are jumping for joy. The 40% of the market, all the ‘moderate, high and very high risk clients’ are looking to switch from regular banks to a more forgiving informal lender. With their access to cheap and extensive informal distribution networks, mobile money lenders are happily preparing for good times to come.

While the bill was introducing capped rates to “spur private sector lending to critical sectors of the economy” will it actually be killing the formal banking sector with the same stroke?

Whatever the case, we are in for some very interesting financial times in Kenya, and with Uganda and Tanzania looking at capping the rates following Kenyan example, East Africa too!