The Effect of Interest Rate Capping on the Amount of Credit Issued by Commercial Banks in Kenya

Abstract

This research project is aimed at establishing the effect of interest rate capping on the amount of credit issued by commercial banks in Kenya. The capping law aimed at restricting the amount of interest rate charged on loans by commercial banks in Kenya came into effect in September, 2016 amidst much protest from the industry players and other organizations including the IMF. The aim of the government was to increase the financial inclusion among individuals and businesses and also increase the amount of loans disbursed in the economy drastically on the wake of high and uncontrolled interest rate charged by commercial banks. The argument was that the banks were charging very high interest rate such that the credit was not affordable and/or had increased the financial indebtedness among the businesses thus the government could not achieve its growth targets at such rates. In order to reverse this trend, the government through its legislative arm introduced a bill in the parliament to control the interest rate to no more than four percent the CBR. There being opposing literature on the effect of such control on interest rate, the study sought to study the effect of the control on Kenyan scenario. The study period covered three quarters before and after the capping law came into effect. Descriptive and inferential statistics was employed in the study. The findings were that the interest rate control did not significantly affect how the commercial banks issued their loans. Although the study did find that some banks contracted their loans books after the law came into effect, such were not enough to shift the ground for the whole industry. However, it was also found that the growth of the credit was not drastic as the policy makers would have projected and only grew by 0.2% more as compared to pre-capping period.