Kenya lifts rate cap, boosts hope for new IMF agreement
Kenya’s parliament passes a law to lift an interest rate cap that has hampered credit growth and economic development, in a move that may pave the way to a new agreement with the IMF.
Local Kenyan shilling-denominated bond yields had risen in the weeks leading up to the vote
Bank stocks rallied and investors rushed to buy local Kenyan government bonds after the country’s parliament voted on Tuesday to remove the cap on banks’ commercial lending rate, a move that will stimulate economic growth and improve access to funding for the riskiest parts of the economy.
With the country’s lenders encouraged to turn the credit taps back on, access to financing for the country’s under-funded small and medium-sized enterprise sector is expected to improve, while the pick-up in credit growth will lead to a recovery in the asset quality of local banks.
The agreement will be good for Kenya’s economy, for its growth prospects and will support the already existing strong growth momentum seen this year, according to Guy Tossou, a portfolio manager at BNP Paribas Asset Management based in London.
The cap was imposed in 2016 as part of the government’s bid to reduce the cost of borrowing, expand access to credit and increase the return on savings, but it had the opposite effect, keeping many fund managers sitting on the side lines.