Despite the great intention behind the Banking Amendment Act 2016, it is yet to achieve its intended objective one year down the line.

The Act, which caps commercial bank lending rates at four per cent above the Central Bank Rate, was meant to boost lending to consumers by making credit more affordable.

However, the opposite has happened. Borrowers, and especially small enterprises, can no longer access credit under the rate cap regime.

According to a recent credit survey undertaken by the CBK, 54 per cent of the commercial banks admit that interest rate capping has negatively affected lending to the SMEs.

The primary reason for this is that rate caps have limited their ability to price for risk, pushing them away from traditionally risky segments such as SMEs to the risk-free government paper.

The credit crunch that the SMEs are facing is having dire consequences on the broader economy.

SMEs account for 45 per cent of the gross domestic product and employ up to 80 per cent of the work force. If they sneeze, the whole economy catches a cold.

This is already being witnessed in many sectors, where staff redundancies and shrinking earnings have become the norm.

In view of the impact that the rate caps are having on the SMEs, the Act needs to be reviewed and, if necessary, repealed.

I would like to clarify that right from the outset, the chamber has fully supported the spirit behind the rate caps and will invariably continue to do so.

Rate caps were aimed at lowering interest rates, and we support lower rates.

A lower cost of borrowing encourages consumers and firms to take out loans to finance greater spending and investment.

This is essential for the SME sector, which needs capital to grow robustly and create jobs for the increasing number of youth who lack gainful employment.

However, the rate caps have proven ineffective in achieving the desired end of making credit more available and affordable.

This is a challenge for all the stakeholders to explore other ways of making credit more accessible to the SMEs.

One of the primary causes of financing difficulty for SMEs is information asymmetry.

These are situations where banks have limited information about the SMEs, making it harder to ascertain their credit worthiness.

The profit a bank expects to make from lending to an SME rarely justifies the cost, in terms of time and money, of getting sufficient information about it.

This issue can be addressed by encouraging SMEs to be more forthcoming with details on their businesses.

They should use formal payment channels and keep detailed transaction histories.

Such information greatly lessens risk and can make the difference between SMEs getting quick loan approvals or having their loan applications rejected.

Similarly, banks need to share more relevant information about SMEs among themselves.

Very often, if an SME moves from one lender to another, its previous bank will share information selectively.

This means that the SME will have to build its reputation afresh, despite having a good credit history.

This is yet another barrier for SMEs seeking access to credit in Kenya.

We should consider policies that will spur consolidation in the banking sector.

Although Kenya has 42 commercial banks, liquidity is concentrated in the hands of a few players, mainly Tier I and II banks.

The skewed distribution of liquidity clearly shows that the market is ready for consolidation; it is ready for bigger and better capitalised banks.

A big bank, like any big player in other industries, typically enjoys economies of scale and better efficiencies.

This means that it is able to make a profit even in a low interest rates environment.

Moreover, big banks are more concerned about the volume of loans they disburse than the interest income they make per facility.

It is, therefore, in their interest to ease access to loans, which would be beneficial to the SMEs.

If Kenyan lenders merge to form bigger and better capitalised banks, they will be able to lend to a higher number of SMEs at lower rates and still make a decent profit.

Banks will be happy and the SMEs will be all the happier.

Such win-win situations are possible, but we first need to accept that the rate caps are a failed experiment and muster the courage to try something different.