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Kenya

To Cap or not to cap? What does Kenya’s experience tell us about the impact of interest rate caps on the financial sector?

Bilal Zia's picture

Interest rate caps can have far-reaching consequences on the composition and maturity of commercial bank loans and deposits. From both a policy and research standpoint, it is important to understand the mechanisms behind such impacts and the channels through which they affect various players in the financial sector.

While cross-country evidence suggests that interest rate caps can reduce credit availability and increase costs for low-income borrowers1, rigorous micro-evidence on the channels of impact within an economy is missing.

In a new working paper that uses bank-level panel data from Kenya, Mehnaz Safavian and I carefully examine the impact of the recently imposed interest rate caps on the country’s formal financial sector.2

In September 2016, the Kenyan Parliament passed a bill that effectively imposed a cap on interest rates charged on loans and a corresponding floor on the interest rates offered for deposit accounts by commercial banks. This new legislation was in response to the public view that lending rates in Kenya were too high, and that banks were engaging in predatory lending behavior. The interest rate caps were therefore intended to alleviate the repayment burden on borrowers and improve financial inclusion as more individuals and firms would be able to borrow at the lower repayment rates.

The Kenyan financial transformation (2000-2015)

Michael King's picture

Giant leaps in financial inclusion driven by private sector innovation and supportive regulation have made Kenya a case study in financial sector development. A new book brings together a group of academics to investigate the myriad of dimensions of and issues that lie beneath Kenya’s much-touted financial inclusion success story. The book is available at this link: Kenya’s Financial Transformation in the 21st Century.

Kenya: A World Leader in Financial Inclusion?

Headline figures from survey data place Kenya at the top of the financial inclusion index both regionally and globally. Data from the last Global Findex survey shows that 75% of Kenyan adults have a formal account that allows them to save, send or receive money. In 2014 Kenya outperformed both the global average and many middle-income countries such as Chile, Brazil, India, Mexico and Russia.

Low Cost Banking: How Retail Stores and Mobile Phones Can Transform Access to Finance

Ignacio Mas's picture

More than 3 billion people in the world today don’t have access to savings accounts. Many of these 3 billion fall below the less-than-$2-per-day benchmark of the world’s poorest people. Why are banks not doing a better job to help them manage their financial lives?

The problem is largely one of cost. Providing financial services to the poor is prohibitively expensive for banks. Each time a client stands in front a of a teller’s window it costs most banks from $1 to $3. If poor clients make transactions of $1 or $2, or even less, banks won’t be able to support the costs.

It’s also too costly for the poor. Most poor people, especially those in rural areas, live far away from bank branches. Let me give one example of a woman in Kenya. The nearest branch may be 10 kilometers away, but it takes her almost an hour to get there by foot and bus because she doesn’t have her own wheels. With waiting times at the branch, that’s a round-trip of two hours – a quarter or so of her working day gone.  While the bus fare is only 50 cents, that’s maybe one fifth of what she makes on an average day. So each banking transaction costs her the equivalent of almost half a day’s wages.