Interest Rate Caps in Kenya

A bank is a place that will lend you money if you can prove that you don’t need it” Bob Hope

In early September, a new banking bill became law in Kenya. The new banking law caps interest rates that banks can charge (at 4% above the CBR rate) and also introduces a floor on the rates that banks have to pay for savings account (at 70% of the CBR rate). For a bank customer its kind of great news, we have yearning for a long time for more reasonable interest rates on loans. At the prevailing interest rates its just not reasonable to borrow and I would like to see the rates go way down but I believe it has to be driven by market forces and not by law. The unintended consequence of this law, might be that banks will simply refuse to lend to risky customers and maybe they  will see me as a risky customer so I will get locked out of accessing credit.

I am quite happy about the high interest rates on savings deposits –  because no matter how small your savings you will earn 7% – where else in the world can you earn such interest rates? Unfortunately I do not really have savings right now but its made me seriously consider saving some money – although with our banks you never know, there just might be a catch to this. Either-way I am going to start trying to accumulate some little savings in my savings account but not at the expense of my major financial goals which are to build an equity portfolio and eliminate credit card debt.

However, I also have banking shares and I need them to double but instead they were hit by the new law – overly hit I believe. In hindsight, I should have sold prior to the bill being signed into law, no matter how unlikely it seemed, but I am not managing my portfolio in a very active way – I am more of a buy and hold investor for the moment. I can actually tolerate some capital losses for now.

Credit growth in Kenya has slowed significantly this year – last year credit to the private sector grew about 20%, this year I think we are at 5% and now with this new law it might even grind to a halt completely next year. Its difficult to predict what will really happen, and how this interest rate law will affect the financial sector and the economy, we can only wait and see. Even though credit growth has slowed significantly this year which is very bad for business, the economy does not feel entirely gloomy to me, I see allot of progress and investment going on all around me. It is a very strange, a mixture of positive and negative.

As soon as the new year starts, I am going to purchase a car on loan and that will be my first experience borrowing in Kenya, lets see how willing or not willing they are to grant me credit.

Happy investing!

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