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IMF says Kenya's new banking laws to adversely impact economy

Xinhua, November 5, 2016 Adjust font size:

The International Monetary Fund (IMF) on Friday expressed concern about the recent amendments to Kenya's Banking Act that set limits on deposit and lending rates, saying they may have an adverse impact on the country's economy.

An IMF mission led by Benedict Clements, that visited Kenya from Oct. 19 to Nov. 3, said the adverse effects could lead to lower economic growth and undermine efforts to reduce poverty.

"While these amendments aim to reduce the cost of borrowing and increase the return on savings, international experience shows that interest rate controls are ineffective and give rise to unintended negative consequences," the IMF mission said in a statement released in Nairobi.

"These include reduced access to financing for small and medium-sized enterprises, and an increase in informal and predatory lending at much higher interest rates."

The Banking Amendment Bill 2015 which was passed by parliament in July effectively limits the interest rates charged by banks to four percent of the Central Bank Rate.

With the CBR currently at 10.5 percent, banks cannot charge higher than 14.5 percent as interest on credit.

The bill intends to regulate interest rates that are applicable to banks' loans and deposits, capping the interest rates that banks can charge on loans and must pay on deposits.

The law that came into effect Sept. 14 has ushered in a new regime that has intensified competition between the banks, with some capping their loans rates at the recommended 14.5 percent rate while others are taking them lower.

The IMF warned that the interest rate limits could also reverse the remarkable increase in financial inclusion that has benefited a large proportion of Kenya's population.

"In addition, interest rates limits undermine the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth," the statement said.

The statement said during the mission, discussions focused on macroeconomic policies and structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth.

"There was broad agreement that macroeconomic policies would need to be prudent to maintain the sustainability of public debt on a sustainable path, contain inflation within the target range, and preserve external stability," it said. Endit