TThe goal of the interest rate cap was to make lending more affordable for the general public, to increase access to credit and eventually jumpstart the economy.
Instead, it had the exact opposite effect.
- It reduced the will of the banks to lend to risky applicants – in other words SMEs. Remember, informal businesses in Kenya make up over 80% of business in Kenya. So effectively over 80% of business had reduced access to bank credit;
- Banks preferred bigger, more stable loan applicants, like large institutions and the public sector;
- Banks increased fees and charges to their existing clients (the other day I asked for the company bank statements and I was being charged 500 bob per page!!!);
- Small banks who filled the gap in the market for high risk/ high return lending faced portfolio shrinkage since they could no longer lend to risky applicants; and
- There was an increase in predatory lending – high risk lending which puts companies, lives and families in jeopardy.
The IMF stated recently that competition amongst Kenyan banks was the lowest in Africa, and bank profits are very high. This brings into question the proper role of regulation and where it would make the most sense. How can we draft legislation to curb the “Damned if you do; damned if you don’t” restricted or predatory lending effect on SMEs?
Not only was the interest rate cap regulation in and of itself a bad idea, what made it worse was that is was so stringent. Interest rate caps have worked never – ask Zambia, Colombia, France, Italy, the US, Bolivia, Armenia, Poland – anyone could have told us.
So what would have worked?
Our research at Expertise Global points to a few ideas and modifications for increasing access to credit:
- Increase competition amongst banks to put an end to cartel/collusion like behavior.
- Introduce progressive taxation to help level the playing field and reduce inequality
- Ok, yes, set a cap, but set it high enough that banks can still lend to risky applicants. Propose tiers of lending on level of risk and requisite lending for level of risk. Then have the CBK proactively regulate lending (spot checks) to ensure fairness and equity.
One other thing – all was not lost. SACCOs and small community lending structures were singing all the way to the Bank (?) as most SMEs turned to them for lending. Local innovations that have adapted to the local context always seem to save the day.
