It’s my take that Kenya must do away with the retrogressive law. It doesn’t serve the common Mwananchi, it doesn’t serve investments, it’s doesn’t serve growth. Few points..
1. Money like any other commodity has a price.. The price of money is interest you pay of the principal. The amount the lender pays is the cost and the reward the saver get is “profit”..
2. In a growing economy, low interest rate is desirable. In a nutshell, Low interest rates leads to more borrowing. More borrowing leads to more consumption. More consumption leads to more production and more production leads to jobs and economic growth. On the supply side, low interest rate is an incentive for business people to borrow more for investment.
3. High interest rates leads to more saving. This postponement of current expenditure leads to low consumption and in the end low production and investment respectively.
4. While we all agree that we must pursue low interest rates as a country, capping interest rates can only be counter productive. Banks are literally not lending to those who the law was made to benefit. Mwananchi is paying more in shylocks and other non banking financial institutions as banks classify them as too risky to lend at the current capped rates.. Why make Unga ya Ugali cheap and it’s not available?
5. For the law to work, and for the economy to benefit, we must segment our credit. Credit that leads to consumerism especially on imported goods should be left to the market forces. Lending to businesses should be segmented, protected and by all means made low.
6. We must regulate the amount of money GoK borrows from commercial banks.. Uptake of government instruments by commercial banks should also be regulated. A sane banker cannot lend to a customer with a high-risk profile at 13.5% when government instruments have the same yield.
7. We must strengthen our Competition Authority. Our banks just like private hospitals and downstream oil dealers are cartels.. The products they sell are similar and the customer is left indifferent. The only deciding factor is price. If these cartels fix prices to maximize profits, the customer ends up as the net loser.
8. I support review of the capping law. It has yielded opposite results. Banks are still making money as they used to. They’re lending billions to GoK thereby choking credit to where it’s needed most – private sector.
9. After all is said and done, our businesses must explore the many other avenues of raising (additional) capital. What happened to IPOs? Private Equity is another front. We must work on the interest rates issue from the demand side as much as we focus on the supply side.
10. All above is Ceteris Paribus.
11. I know a politician shouldn’t be seen arguing in such a manner for fear of being seen as siding with banks but as an Economist who lives in Kenya, I must admit that truth however unpopular is what counts in the longrun at such a time like this.