Do Interest Rate Controls Work? Evidence from Kenya

By Emre Alper, Benedict J. Clements, Niko A Hobdari, Rafel Moyà Porcel

May 31, 2019

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Emre Alper, Benedict J. Clements, Niko A Hobdari, and Rafel Moyà Porcel. Do Interest Rate Controls Work? Evidence from Kenya, (USA: International Monetary Fund, 2019) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper reviews the impact of interest rate controls in Kenya, introduced in September 2016. The intent of the controls was to reduce the cost of borrowing, expand access to credit, and increase the return on savings. However, we find that the law on interest rate controls has had the opposite effect of what was intended. Specifically, it has led to a collapse of credit to micro, small, and medium enterprises; shrinking of the loan book of the small banks; and reduced financial intermediation. We also show that interest rate caps reduced the signaling effects of monetary policy. These suggest that (i) the adverse effects could largely be avoided if the ceiling was high enough to facilitate lending to higher risk borrowers; and (ii) alternative policies could be preferable to address concerns about the high cost of credit.

Subject: Bank credit, Banking, Central bank policy rate, Credit, Financial institutions, Financial services, Interest rate policy, Loans, Monetary policy, Money

Keywords: Africa, Bank, Bank credit, Bank intermediation spread, Bank lending to the public sector, Bank profit, Central bank policy rate, Control, Credit, Credit growth, Deposit rate floor, Interest rate, Interest rate policy, Intermediation spread, Lending, Lending activity, Lending cap, Lending caps, Lending rate cap, Loans, Monetary policy, Policy rate, Rate, Reference rate, T-bill rate, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/119
Stock No:

WPIEA2019119
ISBN:

9781498313957
ISSN:

1018-5941

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