REASONS AGAINST INTEREST CAPPING

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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