Should Interest Rates be Capped in Kenya? After all, markets are not perfect.

Should interest rates be capped in Kenya? The answer is simple. It depends on who you ask since there are different stakeholders in this debate. If you ask borrowers, most would genuinely answer yes. Recently, one borrower stated to me, “Something needs to be done. We borrowers should unite and call for cheaper interest.”

Within the Kenyan government, politicians have differing opinions as well. Such views are becoming public with the recent debates and defeat of the proposed amendments to the Finance Bill that would have capped commercial lending rates at four percent above the Central Bank Rate.  

Even though lending opportunities continue to expand in Kenya with the start of new commercial banks, microfinance institutions and Sacco societies, the competition has yet to provide benefit to consumers through lower rates. Specifically, within microfinance, an industry that continues to blossom, the push for profitability and sustainability as the metrics for success has not benefited consumers as interest rates continue to increase. This has created a lending culture of putting profit before the client.

When I first started researching microfinance lending in Kenya two years ago, interest rates were as high as 14% per annum, but now the rates range from 23%-30% per annum for these low income financial consumers. As a researcher of microfinance, many consumers continue to ask me: How high can interest rates continue to climb?

The reality is that all financial institutions operate in the interest of profit, not the welfare of consumers. This may be a simplistic view of lenders, but it is the reality of consumers.

Currently, as I prepare to launch a new consumer education manual to help expand the financial literacy of microfinance borrowers, I myself realize that this initiative will not be successful without increased regulation over the financial industry.

There needs to be a transformation of the current institutions of advocacy and consumer protection in Kenya at the policy level through an increase in legislation and regulation of the financial industry to compliment the efforts of Kenyan civil society organizations and consumers.

Perhaps capping interest rates would have been the first step towards achieving these important parameters necessary in any financial market? After all, markets are not perfect.

Even though economists in Kenyan and around the world are against the freezing of interest rates in any market,  I find it curious how rumors and accusations are surfacing again that members of parliament benefited (or potentially benefited) once again from the lack of concrete action toward financial regulation that would increase consumer protection in Kenya.

While many members of parliament claim that capping rates would be devastating to the economy, there is no excuse why other measures to increase consumer protection, including creating a consumer protection bureau, amending the acts that regulate the different players of the Kenyan financial market and passing the Consumer Protection Bill, have failed as well. 

After all, markets are not perfect, so where is the change when it is needed?