interest rate cap

TV Panel: The Interest Rate Debate

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On the June 18, 2018 Fanaka TV held a debate in collaboration with the Kenya Bankers Association, The institute of Economic Affairs and Strathmore Business School. The debate engaged both sides of the capping divide with an intention of deeply analysing the impact of capping of interest rates and came up with possible solutions and way forward. I was among the panelists for the debate.

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TV Interview: Reduction of the interest rate

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I was on CGTN discussing the decision of the Monetary Policy Committee to reduce the Central Bank Rate, in the context of an interest rate cap.

Factors that will inform the cost of living in 2018

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This article first appeared in my weekly column with the Business Daily on January 14, 2017

This year started with the news that price for maize flour has increased from KES 90 to KES 115 after the stock Government subsidised flour ran out. Understandably, Kenyans are complaining with many asking how they are going to manage rising costs of living, particularly in urban areas.

There are several factors informing the increase in the cost of living the first of which is that the country has not fully recovered from the 2017 drought. The short rains have not been as robust as hoped and thus food production is till sub-par. As a result, until the country fully recovers, Kenyans can expect to continue to face upward pressure on food prices.

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(source: https://www.foodbusinessafrica.com/wp-content/uploads/2017/09/MaizeonShelfKenya.jpg)

Linked to the point above is continued aggressive inflation. During the last four months of 2017, average inflation was between 7.98 and 8.4 percent- well above the preferred government ceiling of 7.5 percent. Thus inflation will mean money does not stretch as far as it used to, and thus Kenyans will find basic items eating into their household budgets significantly.

Third is the reality that 2017 was a tough year for the economy due to several factors, the first of which was a struggling agriculture and financial sector. Agriculture which is about 30 percent of the economy was hit by the drought and the financial sector, which is about 10 percent of the economy, was hit by the effects of the interest rate cap. Finally, the prolonged election period affected the economy and GDP growth was revised downward from 5.9 percent to an actual growth of 4.4 percent in Q3 of 2017. Elections have tended to have a negative effect on economic growth and 2017 was not an exception. Suspended investment decisions and disrupted business activity led to the reality that Kenyans did not make as much money as they would have had it not been an election year. As a result, Kenyans are feeling the pinch of muted economic growth as having less money in their hands leaving them feeling more broke than usual.

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(source: https://www.bizmalawi.com/sites/default/files/images/news/inflation1.jpg)

Fourthly, as I have stated before, the interest rate cap led to a contraction in credit growth as banks became more hesitant to extend credit in the context of capped loan pricing. Sadly, credit growth may be further stymied by the onset of the new International Reporting Financial Standard 9 (IFRS 9) where banks are required to switch from an incurred to an expected loss model. Without getting into much detail, IFRS will mean that, at least in the short term, banks will be more risk averse as they reduce lending periods to high-risk borrowers to limit the probability of default. Thus Kenyans may find that it will be even harder to get access to credit due to both the cap and adoption of IFRS. This will lead to less money in the hands Kenyans which will make them to more acutely feel the cost of living.

Finally, the cost of oil is set to rise in 2018, which is not good news for Kenya which imports oils products. Increases in oil prices will likely drive inflation upward exacerbating the already high inflation status the country is in at the moment.

In short, Kenyans should brace for a high cost of living in the short term. It is hoped that a return to stability will allow the economic engine to get back to normal and create channels through which Kenyans can earn an income to adequately meet their cost of living.

Anzetse Were is a development economist; anzetsew@gmail.com

How the interest rate cap has helped banks

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This article first appeared in my weekly column with the Business Daily on December 17, 2017

The interest rate cap and the effects it has had on the financial sector, specifically banks, has been a consistent feature in discussions about business and economics in Kenya this year. The main effects of the cap have been a notable contraction in liquidity particularly to SMEs. Banks are of the view that the cap has limited their ability to build risk into loan pricing and thus prefer to lend to government and larger companies. However, there are ways through which the interest cap, perhaps inadvertently, helped banks given the turmoil it has created in the sector.

Firstly, the cap has forced the sector to become more efficient. In order to cut costs to, partly, manage the effects of the cap, banks have put in several measures such as closing branches, reducing employee numbers and leveraging automation. Technology has been aggressively brought on board via new features, such as PesaLink, that reduce the need for staff to receive and process payments. Low performing branches seem to have been shut down and over 2,000 staff have been laid off. Perhaps the cap fast-tracked these efficiency measures since it was clear that automation, for example, had been part of long term plans for the sector. That said, the cap has forced banks to become leaner and more efficient entities in order to protect profit margins.

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(source: https://securecdn.pymnts.com/wp-content/uploads/2017/01/mobilebankingkenya.jpg)

Secondly, the cap may well have started a conversation among bank management on their risk assessment tools. It is an open secret that banks in Kenya are risk averse and generally want security in the form of assets or a monthly pay cheque against which they issue credit. Perhaps the cap has forced banks to rethink their risk assessment tools in order to better delineate high versus low risk clients. It is time the banking sector created more sensitive tools that look beyond assets and monthly salaries to determine whether credit will be offered or not. The reality is that there are relatively high income Kenyans who would likely be safe bets but have ‘informal’ sources of income that tend to be immediately classified as high risk by banks. It is time banks sophisticated their risk assessment tools to more clearly determine to whom they should lend. Hopefully the cap catalysed a conversation in this direction.

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(source: w3bf.com/assets/img_main_1312560556.jpg)

Finally, the cap has perhaps woken the sector up to the need to be seen as an ally of the Kenyan people. One of the factors that informed the implementation of the cap was the widespread feeling among Kenyans that banks were greedy shylocks that deliberately over-priced loans with little concern over the onerous weight such pricing placed on Kenyans. Indeed disgruntlement with the banking sector is what led to popular support for the cap in the first place. Thus, hopefully the cap has made the sector more fully appreciate the need to be an ally of the Kenyan people by pricing loans more reasonably in the future.

Anzetse Were is a development economist; anzetsew@gmail.com

How Kenya can recover in 2018

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This article first appeared in my weekly column with the Business Daily on December 3, 2017

After what has been widely noted as a difficult year for Kenya, the conversation must now turn to how Kenya can recover. The first step to doing so is acknowledging the factors that held economic growth back and those that sustained and propelled growth.

The first sector that was hit was obviously agriculture, due to the drought which made many Kenyans food insecure, hit forex earnings from the export of agricultural commodities and of course led to aggressive inflation. The financial sector was negatively affected by the continued unfolding effects of the interest rate cap and linked to that, credit growth, particularly to SMEs shrunk considerably. Finally, a great deal of investment was held back over the course of the year. Indeed, a few weeks ago, the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.

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(source: https://agra.org/news/wp-content/uploads/2016/11/MWfarmer-maize-green-790×527.jpg)

It is important to unpack the impact of deferred investment because there are negative ripple effects linked to this, particularly in the African context. When investors choose to hold off on investing, several entities are hit. These include market research companies, product developers, manufacturers, advertising companies, suppliers, and distributors. The entire ecosystem around investors suffers as investors make the decision to postpone or defer investment. As a result, the multiplier effect of suspended investment has left many Kenyan feeling particularly financially strapped this year.

On the bright side, Micro, Small and Medium Enterprises (MSMEs), most of whom actually sit in the informal economy, proved to be hardy. The Central Bank of Kenya (CBK) stated that MSMEs showed ‘extraordinary resilience’ and helped cushion the economy. The factors behind this resilience has not been formally unpacked but studies on the informal economy reveal an nimbleness, flexibility and litheness that larger, more formal businesses may find difficult particularly within short time frames. Challenges aside, informal businesses have an ability to change their business models and adapt to a changing environment much faster than formal businesses with more rigid structures and processes.

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(source: http://www.goldmansachs.com/citizenship/10000women/meet-the-women-profiles/kenya-women/mary-kenya/slide-show/mary-slide1.jpg)

Going forward, it is important to take remedial action on what emerged as weak spots. This will begin by ensuring better coordination between national and county government on the management of agriculture in the country as well as serious consideration of the repeal or adaptation of the interest rate cap. In terms of positive aspects, MSMEs ought to be prioritised going forward and given the necessary support by government, financiers and business development agencies to scale formal MSMEs with promise, and support informal MSMEs on the journey of sustained profitability and formalisation.

Finally, both government and domestic private sector have to give candid and honest signals on the state of the political economy in Kenya. Investors need to be given a clear indication of when and where to invest such that the investment ecosystem is sustainably revived.

Anzetse Were is a development economist; anzetsew@gmail.com

 

Monetary Policy a bright spot in Kenya

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This article first appeared in my weekly column with the Business Daily on November 26, 2017

This has been a difficult year for the Kenyan economy. A combination of the drought, effects of the interest rate cap on the economy and the extensive electioneering period all slowed down economic growth and performance. However there has been a bright spot; monetary policy. Monetary policy has played a crucial role in being a stabilising anchor for the country.

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(source: owaahh.com/wp-content/uploads/2016/04/CBKpx.jpg)

The first means through which this is seen is in the value of the Kenya Shilling. Given the turbulence of the electioneering period in particular, it was largely expected that the value of the shilling would be knocked. However, through practical action by the Central Bank of Kenya (CBK), the value of the shilling remained relatively stable, hovering at around KES 103 to the dollar.

Secondly, is the effect of monetary policy on inflation. While inflation rate was above the preferred ceiling of 7.5 percent for a better part of the year, it came down to below the ceiling in July, and with the exception of August, has remained below 7.5 percent. The high inflation was, of course, informed by the drought that pushed up food prices and electricity that latter of which pushed up the costs of production. The management of inflation is particularly commendable given than the CBK basically couldn’t use changes in the interest rate, a key monetary policy tool, to manage inflation.

The introduction of the interest rate cap has fundamentally constrained the CBK’s ability to fiddle with interest rates to manage money supply and inflation. The cap has made the effects of a change in the rate unknown, thereby understandably engendering reluctance to change the CBR. Indeed, I am of the view that the interest rate cap has turned monetary policy upside down; an increase in the rate may create an expansion rather than contraction in liquidity, as more people would qualify for the higher rate risk ceiling. And lowering the rate would likely contract rather than expand liquidity as even fewer people would qualify for the lower rate risk ceiling. Thus it is not a surprise that the Monetary Policy Committee chose to leave the Central Bank Rate unchanged last week.

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(source: http://www.mygov.go.ke/wp-content/uploads/2015/08/shilling.jpg)

While on the topic of the interest rate cap, its continued effects are disturbing. Beyond engendering a massive contraction in the growth of credit, it seems the cap may be dampening private sector appetite for credit. No longer qualifying for credit lines on which they used to rely, businesses have likely changed their business models to accommodate this lack of access to credit. Thus, the real test for the economy will begin if or when the cap if lifted, and whether private sector will demonstrate robust appetite for credit, having essentially survived without it for over year.

Again, in the context of a cap, the CBK has played a constructive role in managing the dynamics of the financial sector in two ways. The first is in pushing for a repeal of the cap; the second is in urging commercial banks to price their loans more reasonably. The CBK is using the opportunity created by the cap to try bring sanity to a sector that is largely seen as extractive, saddling Kenyans with very expensive debt all in the name of profit. These efforts by the CBK should be commended.

Going forward, it is important that monetary policy continues to anchor the economy and buffer Kenyans from volatility in the macroeconomic environment.

Anzetse Were is a development economist; anzetsew@gmail.com

TV Interview: Growth of the Kenyan Economy and the Interest Rate Cap

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On November 22, 2017 I sat with Ramah Nyang of  CGTN to discuss monetary policy in Kenya and the effects of the interest rate cap.