Do Interest Rate Controls Work? Evidence from Kenya

22 Pages Posted: 18 Jun 2019

See all articles by C. Emre Alper

C. Emre Alper

International Monetary Fund (IMF)

Benedict Clements

International Monetary Fund (IMF) - African Department

Niko Hobdari

International Monetary Fund (IMF) - African Department

Rafel Moyà Porcel

International Monetary Fund (IMF) - African Department

Multiple version iconThere are 2 versions of this paper

Date Written: May 2019

Abstract

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.

Keywords: Bank rates, Interest rates on loans, Mortgages, Interest rate ceilings, Bank credit, Lending rate cap, deposit rate floor, monetary policy, lend rate, small bank, SMEs, intermediation, CBK

JEL Classification: G21, E43, E52, E01, G2, E5

Suggested Citation

Alper, C. Emre and Clements, Benedict and Hobdari, Niko and Porcel, Rafel Moyà, Do Interest Rate Controls Work? Evidence from Kenya (May 2019). IMF Working Paper No. 19/119, Available at SSRN: https://ssrn.com/abstract=3405986

C. Emre Alper (Contact Author)

International Monetary Fund (IMF) ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Benedict Clements

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Niko Hobdari

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Rafel Moyà Porcel

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

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