Treasury Once Again Recommends Repealing of Rate Caps

Treasury has – again – recommended the repealing and scrapping of the bank rate cap as it is hurting Small and Micro Enteprises.

Dr Geoffrey Mwau said that the government ought to be engaged and given more information and data on the debilitating effects of the rate cap law, which he says is negatively affecting the economy.

“I think the most important thing is to engage them ( government) and provide more information and data that it is actually hurting economy, especially SMEs, I have seen some Members of Parliament beginning to appreciate this,” he said.

The law came into force in 2016 and has received sharp criticism including the IMF, who have maintained that the move be rescinded in order for the country to access the Balance of Payment support.

Wolrd Bank also released a paper highlighting the weaknesses of the rate cap as it favoured governments because most banks could not risk investing in “risky market segments.”

“Having the nominal
interest rate so close to the government risk-free rate meant that banks had
little incentive to provide financing to risky market segments. Instead,
commercial banks directed their investments to government treasury bills.”
Mehnaz Safavian and Bilal Zia the
authors of the paper stated.

In June 2018, Rotich had proposed repealing the interest rate cap. He was backed by bankers whose claim hurts credit growth and access to credit.

The Parliamentary Finance and Planning Committee went ahead and voted for the rate cap.