Kamau Thugge warns Parliament against reviving interest rate caps on loans

The Central Bank of Kenya (CBK) has warned MPs against proceeding with a Bill that seeks to reintroduce caps on interest rates, arguing it will hurt the economy.

CBK governor Kamau Thugge said reintroducing rate capping that was scrapped in 2019 would lead to a credit squeeze in the private sector.

Dr Thugge was reacting to the revelation by Baringo North MP Joseph Makilap who has drafted a Bill to introduce interest rate ceilings that former President Uhuru Kenyatta halted.

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Mr Kenyatta declined to assent to the Finance Bill 2019 and instead asked MPs to scrap lending rate caps.

The government in September 2016 imposed legal caps on lending rates at four percentage points above the Central Bank’s benchmark — then prevailing at nine percent — and set the maximum borrowing rate at 13 percent.

“I want to persuade this committee and Honourable Makilap not to bring back interest caps. It was a disaster. If you bring back that law, it will spell disaster for the economy,” Dr Thugge said.

He appeared before the National Assembly’s Finance and National Planning Committee to present the CBK views on the Proceeds of Crime and Anti-Money Laundering (Amendment) Bill 2023.

“Credit to the private sector reached double-digit as of March 2022. Since 2016 when the interest rate cap was imposed, the private sector had been crowded out,” he said.

“Since then, credit to the private sector averaged five to six percent growth year-on-year. Before the interest controls, credit reached 22 percent. There were no controls and money went to the private sector.”

He said currently, credit to the private sector averaged 12.2 percent from March and imposing caps will deny the sector money from commercial lenders.

Dr Thugge said the CBK has engaged the Treasury on the need to reduce government domestic borrowing to allow the private sector access to more funds from commercial institutions.

He revealed that the Treasury has managed to reduce the budget deficit from 720 billion to Sh430 billion in the financial year 2022/23.

“We have talked to the National Treasury and identified donor agencies which have seen the budget deficit reduced from 586 billion to Sh316 billion,” Dr Thugge said.

“Going forward, we will have less pressure on the domestic interest rate.”

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Committee vice chairperson Benjamin Lang’at (Ainamoi) said the interest caps was sabotaged by the banks.

The Kenya Bankers Association (KBA) told the committee that it has denied the private sector funding in favour of the government.

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