Kenya’s economic growth rate may have to be cut by up to two percent in the next two years should the banking interest rate controls passed by parliament last year hold, The International Monetary Fund (IMF) has warned.

Economic analysts had earlier expressed fears that in the wake of interest rates capping, credit facility uptake by small businesses would be curtailed by banks, a view the IMF has confirmed.

The institution, in its latest review of Kenya’s economy, says that capping the cost of loans has reduced access to credit as commercial banks shun small businesses. This, so far, is leading to a slow economic growth.

“Under the baseline, the effects will be to reduce growth by about 1 percentage point a year,” says IMF.

The move by the parliament to introduce interest rate controls came at a time when there was a widespread public outcry over the banks’ high cost of loans.

Previously, banks could set higher interest rates, as a scheme to record double-digit profit growths every year even as other sectors of the economy stagnated.

Adjusted growth rates

In a recent update, the Central Bank of Kenya has now projected that the economy will grow by 5.7 per cent this year, slowing down from 5.9 per cent in 2016.

Banks in Kenya have been grappling with high operational costs even as they set eyes on reducing the workforce.

Currently, banks have got a  strong backing from the IMF on their urge to have the law capping interests rates withdrawn.

The IMF has, however, expressed fears that introducing controls on interest rates is an ineffective tool to slash loan costs as the move locks out small borrowers, pushing them to informal lenders – commonly Shylocks - who tend to manipulate them.

“Small and micro enterprises often rely on small banks for their loans. Interest controls are likely to hit these small banks harder, which often have to pay higher deposit rates than bigger banks. Interest controls limit the capacity of small banks to pass on these higher costs of deposits to their borrowers,” the fund says.

It adds that large banks are not spared either as they may close unprofitable branches and render hundreds jobless.