Kenya Can Do More Than Cut Rate Caps to Boost Credit, IMF Says

(Bloomberg) --

Kenya should do more than removing interest-rate caps to boost access to finance and credit extension, the International Monetary Fund’s Africa director said.

“There is also a need to foster more competition in the banking system,” Abebe Selassie said Sunday in an interview in Kenya’s capital, Nairobi. The sector should “have effective credit bureaus and quick resolution of disputes,” he said.

President Uhuru Kenyatta recently rejected a bill that seeks to retain caps on interest rates that banks can charge on loans, paving the way for the removal of a law that critics say has been choking the economy.

The 2016 law limits the amount lenders can charge on loans to 4 percentage points above the central bank rate. A court in March annulled the legislation and suspended enforcement of the ruling for a year to give lawmakers time to reconsider its provisions. While the rate caps were intended to improve lending terms for consumers, it has instead made institutions more selective in who they provide money to, cutting into banks’ profit margins and sending people to borrow from unregulated micro-lenders at even higher rates.

“We felt rate caps would not have the intended consequences,” Selassie said. “If you talk to most borrowers, they will say that access to finance -- even if comes at a somewhat higher price -- is much better than having no access at all.”

Banks have started looking at their business models to improve efficiency, central bank Governor Patrick Njoroge said Monday at an IMF event in Nairobi. Lenders now assess risk on a case-by-case basis rather than have a “random number” for most borrowers, he said. “To provide space for jobs, do business, we need to change and remove the caps,” he said.

Sustainable Debt

Selassie also said Kenya should increase revenue to help keep its debt levels sustainable while continuing the government’s agenda of expanding infrastructure. His comments come after lawmakers approved the Kenyatta administration’s plan to increase borrowing, and as tax-revenue shortfalls force authorities to consider lowering targets.

Kenya may also revise this year’s spending plans, National Assembly Budget Committee Chairman Kimani Ichung’wa said Tuesday. The government issued a circular to accounting officials on the intention to cut but hasn’t done so yet, he said.

“Our view is that debt on current policies is sustainable,” Selassie said. But to have more room for public investments, the government should raise its tax collections, increasing the ratio of revenue to gross domestic product by about 0.5% to 1% over three to four years, he said.

“Despite strong growth in Kenya, we haven’t seen taxes growing as much and one of the reasons is because some parts of the economy are excluded from the tax net because of tax incentives, and in other cases because the composition of the economy is changing,” Selassie said. “On tax incentives, it’s really important to keep them to a minimum.”

Other Key Points:

  • South Africa
    • It’s not the macroeconomic stance that’s holding growth back, it’s structural factors, and in particular, weak private investment.
    • While fixing power utility Eskom Holdings SOC Ltd. is important, other reforms are also needed. Resolving the energy problem won’t address the lack of competitiveness, the lack of a competitive IT broadband market or regulations to ensure more investment in mining. It’s as important to resolve mining regulation and have a more competitive telecommunications and IT sector.
  • Nigeria
    • The government needs to start working on revenue mobilization and address insufficient energy supply.
  • Angola
    • The economy needs reduce its dependence on oil and diversify. A relatively competitive exchange rate is needed to make that successful.

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