The Impact of Interest Rate Caps on the Financial Sector: Evidence from Commercial Banks in Kenya

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Bank Lending Rates and Spreads in Emdes : Evolution, Drivers, and Policies

“…In fact, evidence regarding the effects of interest rate caps points to significant negative effects. International experience shows that caps have produced undesirable outcomes such as: reduction in credit supply; higher non-interest fees and commissions and reduced transparency in the cost structure of bank lending origination; adverse compositional changes in loan and deposit maturity; and reduce the effectiveness of money supply (for Kenya, see Safavian and Zia, 2018).…”

Interest Rate Repression Around the World

“…Specifically, caps on lending rates lead to a reduction in the overall supply of credit, with non-trivial effects on financial inclusion as banks are forced to reallocate credit from small, risky borrowers to large commercial borrowers and the government (Heng, 2015;Safavian and Zia, 2018;Alper et al, 2019;Madeira, 2019) and withdraw services from remote areas (Miller, 2013). Transparency is also reduced (Helms and Reille, 2004), and, to the extent that IRCs affect the viability of small banks, risks to financial stability can increase via contagion (Safavian and Zia, 2018;Alper et al, 2019). However, the existing literature usually refers to very severe forms of interest rate repression, often leading to negative real interest rates.…”

Effects of COVID-19 pandemic on Small & Middle-Income Economies (SMEs) in developing nations: A case study of Narok Town, Kenya

“…These delays in settling financial loans greatly affect the economy as the lenders become more stringent in their terms. Interest caps and other policies have previously been enforced to regulate the financial lenders with mixed economic effects (Safavian and Zia, 2018). For example, the Kenyan government imposed a cap on the interest rate of financial lenders in the territory for the financial year beginning 2018/2019 (Safavian and Zia, 2018).…”

“…Interest caps and other policies have previously been enforced to regulate the financial lenders with mixed economic effects (Safavian and Zia, 2018). For example, the Kenyan government imposed a cap on the interest rate of financial lenders in the territory for the financial year beginning 2018/2019 (Safavian and Zia, 2018). This cap was however revised less than two years later as it had greatly limited the liquidity of money in the country.…”