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The International Monetary Fund (IMF) has warned that the banking interest rate controls of last September could cut economic growth by up to two per cent in two years.

 

The institution says in its latest review of Kenya’s economy that capping the cost of loans will reduce access to credit as commercial banks shun small businesses, slowing down economic activity.

 

“Under the baseline, the effects will be to reduce growth by about 1 percentage point a year,” the IMF says in its review.

 

The interest rate controls were introduced after a public outcry over the banks’ high cost of loans that saw the lenders record double-digit profit growths every year even as other sectors of the economy stagnated.

The Central Bank of Kenya has projected that the economy will grow by 5.7 per cent this year, slowing down from 5.9 per cent in 2016.

 

The IMF says the controls are an ineffective tool to slash loan costs as the move locks out small borrowers, pushing them to informal lenders who are even more expensive.

 

The alternative recourse for small and micro enterprises is short-term credit like overdrafts and credit cards, which are again more costly.

 

“Small and micro enterprises often rely on small banks for their loans. Interest controls are likely to hit these small banks harder, which often have to pay higher deposit rates than bigger banks. Interest controls limit the capacity of small banks to pass on these higher costs of deposits to their borrowers,” the fund says.

 

It adds that large banks are not spared either as they may close unprofitable branches and render hundreds jobless.

 

“Both factors will reduce competition and the provision of banking to the population, as experienced in Italy in the 1970s,” IMF says.

 

 

Shrink banks’ margins

The monetary fund last week issued a brief note, calling for the scrapping of the caps that are seen to shrink banks’ margins, triggering a wave of layoffs in recent months.

 

Parliament passed the law capping interest rates last August.