September 2016 saw the real estate sector experienced a decline in financing preceding the introduction of interest caps of section 33B of the Banking Act. The bill capped interest rates by banks at a rate of not more than 4% of the central bank rate. This then drove banks to avoid lending to private sectors including the real estate sector whom they considered high-risk borrowers, preferring to finance government securities. In 2018, reports have it that the contribution to Kenya’s gross domestic product (GDP) by the real estate sector recorded the highest drop within 2 years of the cap’s introduction; from 8.8% in 2016 to 4.1% by 2018.
The introduction of the interest caps also saw the decline of new international and local investors as they avoided investing in property funds, especially in the retails sector, high-end residential, and the commercial sector. The only segment that lightly suffered from this bill was said to be the logistics investment sector.
However, this trend was soon to end as the president of Kenya Uhuru Kenyatta, in November 2019, expressed his reservations with the interest caps as it had caused significant but unintended effects damaging the economy of the country. The president noted to the MPs through a memorandum read to them that, “It is apparent that the capping of interest rates has caused unintended effects that are significant and damaging to our economy and in particular, the Micro Small and Medium Enterprises (MSMEs) which are the hardest hit.”
The president further sided with commercial banks, saying the interest caps had lowered the private sector credit and severed monetary policy transmission by the Central Bank of Kenya (CBK). The president also linked the interest caps to the mushrooming unregulated lenders to the financial sector, “Shylocks and other unregulated lenders have taken advantage of the effects of capping to lend to desperate citizens at exorbitant rates in a predatory manner compounding the already existing problem of lack of access to affordable credit facilities due to prohibitive costs,”
The removal of the interest caps is said to be a turning point for real estate. It is expected to support Kenyans vision for affordable housing.
In a note by Eurasia group, the repeal of interest rate caps was said to be preconditioned by the renewal of IMF’s credit facility in hand with fiscal consolidation. The group also termed the amendment as the strongest sign of prioritization of IMF’s credit facility by the administration.
Removal of the interest caps restored the Central Bank of Kenya as the captain of the monetary policy, putting an end to the 3 years of a weakening bill. The world bank referred to the interest caps as undermining monetary policy transmission and implementation, which has implications on the independence of the central bank of Kenya and its ability to steer the economy.