FINANCIAL MANAGEMENT (FM) NOVEMBER 2019 EXAM
QUESTION 5 (a) (i)
Reasons against interest capping
- Interest rate capping undermines the independence of the central bank which is entrenched in the constitution of Kenya.
- Reduced transparency : an increase in the total cost of loans through additional fees and commissions – witnessed in America, Nicaragua, South Africa and Zambia.
- Decresed diversity of products for low income households – witnessed in France and Germany.
- Reduced banking competition witnessed initially.
- An increase in iilegal lending – Evident in Japan and the United states
- Shifting to expensive loans:
- The riskier borrowers rationed out resort to borrowing from alternatives sources not regulated the caps, which charge much higher rates.
- Impairment of monetary policy transmission
- Negative impact on credit growth
- Elevated risks to financial stability
- Reduced access to financial services
- It leads to unemployment e.g layoffs witnessed in the banking sector
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