Interest rate ceilings are found in many countries throughout the world. With the expansion of the banking sector in Kenya, legislators and the general public have found it difficult to accept that small loans to poor people generally cost more.
Though meant to protect consumers, interest rate ceilings almost always hurt the poor. Through the Jude Njomo Bill, the government went against CBK governor Patrick Njoroge’s advice to establish interest rate ceilings to protect consumers from unscrupulous lenders late last year.
President Uhuru Kenyatta, facing political and cultural pressure to keep interest rates low, assented to the Bill on August 24, 2016.
Despite good intentions, interest rate ceilings have hurt the poor by making it hard to access credit and banks to be profitable, as witnessed from the few banks that have announced their annual reports.
After introduction of interest rate caps, all banks have almost withdrawn from the market, grown more slowly, become less transparent about total loan costs, and reduced their work in rural and other costly markets.
By forcing pro-poor financial institutions out of business, interest rate ceilings have driven clients back to the expensive informal market (shylocks) where they have no or little protection.
What are alternatives to protect Kenyans? To protect consumers from predatory lending, governments may pass consumer protection laws.
Such strategies provide a desirable safeguard without the negative effects of interest rate ceilings.
All banks have almost withdrawn from the market after the introduction of interest rates. Photo courtesy