Do Interest Rate Controls Work? Evidence from Kenya

17 Pages Posted: 9 Oct 2020

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: August 1, 2020

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‐sized enterprises; shrinking of the loan book of the small banks; and reduced financial intermediation. Because of their adverse effects on bank lending, we estimate that the interest rate controls have reduced economic growth by ¼–¾ percentage points on an annual basis. We also show that interest rate caps reduced the signaling effects of monetary policy. These suggest that (1) the adverse effects could largely be avoided if the ceiling was high enough to facilitate lending to higher‐risk borrowers and (2) alternative policies could be preferable to address concerns about the high cost of credit.

Keywords: Africa, deposit floor, interest rate caps, Kenya, monetary policy

Suggested Citation

Alper, C. Emre and Clements, Benedict and Hobdari, Niko and Porcel, Rafel Moyà, Do Interest Rate Controls Work? Evidence from Kenya (August 1, 2020). Review of Development Economics, Vol. 24, Issue 3, pp. 910-926, 2020, Available at SSRN: https://ssrn.com/abstract=3706968 or http://dx.doi.org/10.1111/rode.12675

C. Emre Alper

International Monetary Fund (IMF) ( email )

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

Benedict Clements (Contact Author)

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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