Effects of Interest Capping on Retail Credit Growth in Kenya Commercial Banks

Abstract

Introduction of capping of interest rates by the government through parliament was meant to make borrowing affordable to most of Kenyans. However, this has led to criticisms due to escalation of the overall cost of borrowing due to other additional charges to the possibility of banks withdrawing from lending and hence making credit accessibility. The aim of the study was to assess how the interest rate capping affected retail growth in commercial banks in Kenya. This research was descriptive in nature. The population of this was all the 43 Kenyan commercial banks registered in Kenya. The study adopted a census survey since the study population is not so large. Data on credit supply was obtained from CBK website for the past one year prior the capping and one year post of capping interest rate. A bivariate regression analysis was used to establish link between retail credit growth and capping interest rates. Data was captured and analyzed using Statistical Package for the Social Sciences (SPSS).The study established that interest rates charged by commercial banks are a main factor that affects retail credit growth. Introduction of capping interest rates interfere with the market and hinder financial institutions from offering loan products to those at the lower end of the market. Introduction of interest cap rate has discouraged supply of funds to the financial system, thus encouraging informal mechanisms. From the above findings, the study recommends diversification of funding sources which will enable borrowers tap into Alternative Avenue. Consumer education is also important to enable borrowers how to access credit and establishing a strong credit history. On the other hand, banking (Amendment) Act can be repealed given the current regulatory framework has proved to be a hindrance to credit growth.