Do Interest Rate Controls Work? Evidence from Kenya

Author/Editor:

Emre Alper ; Benedict J. Clements ; Niko A Hobdari ; Rafel Moyà Porcel

Publication Date:

May 31, 2019

Electronic Access:

Free Full Text. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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.

Series:

Working Paper No. 19/119

Subject:

English

Publication Date:

May 31, 2019

ISBN/ISSN:

9781498313957/1018-5941

Stock No:

WPIEA2019119

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

21

Please address any questions about this title to publications@imf.org