OF THE INTEREST RATE CAPS.

The debate on interest rate caps is melodious. To put on a cap or shave bald? The tone is highest where is doesn’t matter. Most of the people talking and dancing to the fact that the interest rates have been capped don’t even take loans. The middle class are very good consumers. Most of them are employed and they enjoy the good things of life at no external cost. They earn a salary, pay rent, eat, fuels, buy cloths and that is it for them. The furthest they have gone to take a loan is a car loan of which they wanted the money! Cost didn’t matter to them, at least at that time. When indulged on why capping of interest rates is good, the best they can tell you is that banks have been milking Kenyans. Will they take advantage of lower rates? NO! Why do Kenyans enjoy cramping of big institutions? Like capping of calling rates would really hype them. So many fallacies have gone round.

First, that credit will be accessible to many. There is a group that has a mindset that lower interest rates will increase the appetite for loans and thus more people will take up loans. Further, that with lower interest rates, the banks will lend more to cover lost margins with higher borrower’s base. Nothing could be further from the truth. Banks don’t sell products in KGs, Liters and dozens. They sell money. One key factor in selling money is that the risk inherent in it is very high and so is the probability of losing some or the whole amount. Banks price their loans taking into account the risk element. How risky are you as a borrower? Do you have the Capital, Capacity, Collateral, Character, and what are the conditions prevailing while you take up credit. Capping of interest rates doesn’t qualify you at all. You remain ineligible as you were before the cap in fact, some eligible borrowers may end up being ineligible due to tighter credit acceptance criteria. No one wants to make a credit sale that in uncollectible.

The second fallacy is that the “common Mwananchi” and the citizens en masse stand to gain. That they are the biggest beneficiaries and thus a political win for Jubilee. Wrong! The bank’s Customer base has not expanded. Not all banked customers are eligible for credit. Credit is a whole different product altogether. The customers who qualify for loans are few and lending institutions chase them around like parasites does hosts. They are the only and biggest beneficiaries. Most common citizens don’t meet the banking standards for credit. Maybe Sacco, shy-locks and most recently Mobile borrowing. Bank credit is not for the sub-prime, and when they lend to subprime, they pay with blood.

Lastly, is interest rate capping good or bad for the economy? A very subjective situation. It all depends on your business understanding, position in the food chain and which economic theory you subscribe to. Let’s stick to the economy. Capping has been branded elsewhere as a popular but blunt method to achieve growth. Truth is, only time will tell. Caps have worked elsewhere but not necessarily here. Good news is that more than 70 countries use a form of capping in more ways than one. For the Kenyan market, it’s just a wait and see situation as we analyze how the monetary policies interact with retail banking and the resulting situation in the economy. One thing is for sure though, it’s a tough time for banks.