This article first appeared in my weekly column with the Business Daily on December 4, 2016
Speaking to businesses over the past few weeks has made it clear that the effects of the interest rate cap are already being felt. And while banks may be experiencing a surge in applications for loans, they seem to be approving fewer than was the case before the rate cap.
As had been my prediction from the beginning, it is the small businesses that are being hit the hardest by the interest rate cap already. Firstly, banks seem to be raising requirements for loans; micro and small businesses have shared with me that they are being told they either need a title deed or log book and that their application is not even considered without at least one of these documents. Yet it is these very businesses that need the credit the most, that do not have the requisite documents. Larger SMEs are getting access to credit but not to the scale prior to the interest rate cap. It seems they too have to make their application risk free to get access credit and even then, not to the scale desired. Very large businesses seem essentially unaffected by the cap because they were getting loans at about the current rate already and often have more options for finance sourcing.
Another negative effect of the interest rate cap is that concessionary lending from banks seems to have become an impossibility. My conversations reveal that previously, projects that stimulated positive social impact some banks espouse such as clean energy would receive competitive rates to encourage the development of that field; such projects are no longer enjoying such flexible lending due to the rate cap. Interest rate variability is a risk management tool for banks and since they do not have access to this tool anymore, it seems that interest rates at below market rate are simply not being awarded anymore, even if such projects previously enjoyed concessionary rates. As a result, some impact focussed businesses are losing out on a key means through which pro-development projects used to be incentivised. Additionally, banks are mitigating loss of income from rate spreads due to the interest rate cap but adding fees and charges to services that were previously free.
Frankly, it was utopian for Kenyans to assume that interest rate capping would unleash lending and attendant business and economic growth. Kenyans are now seeing that liquidity seems to have tightened rather than loosened, as some analysts myself included, had warned. Further, the business environment in Kenya is the biggest impediment to business growth in the country, not just access to finance. The introduction of new fees for the movement of goods and branded vehicles by county governments and the high cost of transport and electricity are some of the biggest impediments to business growth in this country and unleashing financing will not solve these problems.
Devolution has made it clear that corruption, not access to finance which the interest rate cap sought to improve, is a key constraint to business and economic growth in the country. Devolution is positive in that it has brought governance closer to the people, but it has also created numerous channels through which unscrupulous public servants can seek rent from businesses. The problem seems most dire at county level where there is limited automation and inadequate scrutiny of county revenue generation and spending. County officials seem to have the greatest leeway to harass businesses for imaginary infractions with no need to account for their behaviour. Unleashing financing won’t solve this problem.
It is not all bad news however; Savings and Credit Cooperative Societies (SACCOs) have become a more attractive financing option particularly given that some SACCOs already provide credit to members well below current bank rates. This may lead to an expansion of this sector thereby broadening financing options for Kenyans. Further, increased difficulty in accessing loans will make it harder for Kenyans to take on credit for consumptive rather than investment purposes. Applications will have to be thought through more rigorously than perhaps previously was the case; this is good news.
Anzetse Were is a development economist; email@example.com