Capping Interest Rates is not Good for the Industrial Sector

By Phyllis Wakiaga

I would like to add my voice to the on going debate on whether capping interest rates at 4% above the Central Bank Rate will benefit the economy. From a manufacturing point of view, this move could curb the flow of funds to the industrial sector as Banks would resort to lending only to the government and AAA accredited institutions, leaving out SMEs and other borrowers in the cold.

This experiment of capping interest rates has been carried out before in other countries on the continent, albeit in slightly different forms and the method has been found wanting. Microfinance institutions in particular have been targeted so as to reduce the cost of credit given to the poor. Zambia capped the interest rates of microlenders in 2013 but scrapped it in 2015 due to the negative consequences it brought about in that particular sector by inhibiting its growth. South Africa recently also introduced a maximum interest rate on all credit agreements last year. We are yet to see the outcome of such a move.

Studies show that bank credit tends to have an effect on manufacturing output. If Kenya goes ahead to pass the Banking (amendment) bill 2015 as it stands, without any alterations, we could see the flows of credit shift direction away from key sectors such as ours. Last year, the manufacturing sector ranked fourth in loan allocations with Ksh 285.5 billion going to the sector in September 2015. Ironically, for such a capital intensive industry which should rank first in such allocations, this figure is only half of what was loaned out in personal loans.

In the first quarter this year, about half of our manufacturer’s indicated in our quarterly manufacturing barometer that they intend to undertake capital expenditure (CAPEX) projects to expand, increase capacity and carry out plant upgrades. Financial constraints are some of the reasons companies are unable to grow as they would wish to. It is also the key reason why many cottage industries are unable to transition to formal companies. The hardest hit would be small industries that want to unfurl into fully fledged companies which are the future of this economy.

If commercial credit is well channelled it can benefit both the banking and the manufacturing sectors. An idea that has been bandied about that would benefit the local manufacturing sector is to give out loans based on creditworthiness instead of securities. This would grant serious SMEs the necessary access to capital and lead to fewer defaults.

In other words, the manufacturing sector needs affordable credit, but not at the cost of access to that credit.
The future is looking up and there are indications that long run interest rates are going to come down very soon. This month, the Monetary Policy Committee lowered the Central Bank Rate by 100 base points to 10.5 per cent. Our currency is stable due to low global oil prices and there have been fiscal policy interventions to reign in government spending in the coming budget. What can mar such a positive outlook except the upcoming elections next year? Lets not be hasty in this decision.

The writer is the CEO of the Kenya Association of Manufacturers and the UN Global Compact Network Kenya Representative. She can be reached on ceo@kam.co.ke