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 by 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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