Do Interest Rate Controls Work? Evidence from Kenya

C. Emre Alper, Benedict Clements, Niko Hobdari and Rafel Moyà Porcel

No 2019/119, IMF Working Papers from International Monetary Fund

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: WP; interest rate; rate; lending; control; bank; Lending rate cap; deposit rate floor; monetary policy; credit growth; reference rate; lending cap; T-bill rate; Policy rate; bank lending to the public sector; bank intermediation spread; intermediation spread; lending caps; bank profit; lending activity; Interest rate policy; Credit; Bank credit; Central bank policy rate; Loans; Africa (search for similar items in EconPapers)
Pages: 21
Date: 2019-05-31
New Economics Papers: this item is included in nep-fdg and nep-mfd
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Citations: View citations in EconPapers (8)

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