Do Interest Rate Controls Work? Evidence from Kenya
IMF Working Papers, May 31, 2019
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- Do Interest Rate Controls Work? Evidence from Kenya
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Bibliographic details
- Authors: Emre Alper, Benedict J. Clements, Niko A Hobdari, Rafel Moyà Porcel
- Published: May 31, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498313957.001
Overview
- This paper reviews the impact of interest rate controls in Kenya, introduced in September 2016.
- Intent of the controls: to reduce the cost of borrowing, expand access to credit, and increase the return on savings.
- Conclusion summary: the law on interest rate controls has had the opposite effect of what was intended.
Key findings
- The law led to a collapse of credit to micro, small, and medium enterprises.
- The law caused shrinking of the loan book of the small banks.
- The law resulted in reduced financial intermediation.
- Interest rate caps reduced the signaling effects of monetary policy.
Policy implications and recommendations
- The paper suggests:
- (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.
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- Working Paper