Unemployment in Kenya youth seeking for jobs.[photo/corporate-digest.com]Creation of jobs in the economy has declined significantly as banks reduce their lending to local investors, Vision 2030 delivery secretariat Director General Julius Muia says.
He argues that private sector appetite for credit from banks has slowed down one year after enactment of the Banking (Amendment) Act, 2016 which capped interest rates at 14 percent.
“Banks have excess liquidity, more than twice the stipulated liquidity ratio of 20 percent by Central Bank of Kenya (CBK). This is because there are no bankable projects,” said Muia.
Central Bank set liquidity ratio in banks at 20 percent but currently, the percentage has gone up to more than 45 percent. Commercial banks, Muia said are now investing in government bonds which offer high returns.
Muia made the remarks at a briefing organized by Strathmore School of Business in Nairobi recently. President Uhuru Kenyatta signed into law the Banking (Amendment) Act, 2016 after approval by parliament.
The new law made Kenya one of about 76 countries worldwide that have some form of a ceiling or caps on interest rates. According to Muia, banks fear extending credit to customers owing to potential risks, adding: “Major development project have stalled leading to slow jobs production and general productivity in the economy.
The International Monetary Fund (IMF) resident representative Jan Mikkelsen is on record urging the government to remove interest caps while ensuring competition in the sector.
“Interest caps are major policy reversal thus requiring review to allow competition in the economy. Credit to the private sector has been declining since May 2016, though the economy has remained remarkably resilient despite political uncertainty and economic slowdown,” he said.
Kenya Bankers Association chief executive Habil Olaka agreed that banks are enjoying high liquidity in the last one year following the enactment of the interest cap law.