Impact of Interest Rate Capping on Credit Access in Kenya

Abstract

The interest rate caps introduced in Kenya to curtail lending rate charged by banks and other financial lenders has provoked contrasting responses over appropriateness and effectiveness of this regulatory intervention to meet its intended outcome. This study looks into the implications of capping interest rate in Kenya after the enactment of Banking Amendment Act at the end of third quarter of 2016. The study sets-out to investigate interest rate capping impact on credit access. Monthly quantitative data; pre-capping and post-capping data, and vector autoregressive (VAR) model with dummy variable is used to analyse how this policy has affected credit access to private sector. This study observes a negative significant outcome of capping interest rate on credit to private sector. The results show there is a statistically significant impact of interest rate caps to credit access to private sector, and that credit to private sector, lending rate and inflation are affected by their respective previous lagged values. In the light of these results, regulating interest rate through capping is not an effective way for addressing credit cost and accessibility to credit. Rather, the regulation of interest rate should be left at the hands of Central Bank of Kenya which has the official order of conducting monetary policy to monitor and adjust interest rate in accordance with prevailing economic conditions.