The country's Vision 2030 aspires to see
These aspirations can be realised, within the next 16 years, if we experience a robust and sustained economic growth from today. Kenyans are generally known to be hard working, with high entrepreneurial acumen and therefore the country has a great latent. This potential can be unlocked through affordable credit, amongst other factors. Access and affordability of credit has a significant bearing on creating a robust and sustainable economic progress of the country. One, the producer who pays a high interest rate has to factor the high cost of credit in his pricing. Two, the consumer has to buy goods at a higher price because of the high interest rate. This is in addition to the fact that the consumer spends a significant portion of his income on interest for his own credit, be it mortgage or car loan, and less money is available for spending on other goods. And because the consumer is spending less on other goods, the demand for those goods is less and the producer produces less. With less production, the producer employs fewer workers and we have more people in the streets.
As this cycle repeats itself throughout the economy the result is restricted productivity and lower growth in GDP, high cost of living and high unemployment.
Thirdly, with the productivity restricted and a high proportion of income going towards servicing interest expense, there is less taxable income. So the government does not gain either, and government services including infrastructure development suffers.
High interest rates are therefore a major stumbling block to economic development.
If we do not fix the interest rates, we may not be able to fix the economy either. Ensuring affordable and accessible credit may as well be the number one priority of the
Oligopolistic market structures have to be treated the same way you would treat monopolistic market structures, because they both have very similar detrimental effects on the market. Simply put, players are well positioned to control the market for capitalistic gain.
And this is the precise reason why the
On the one hand the mandate of the captains of industry is to maximise shareholder value. These are among the smartest people and this is demonstrated by the level of profitability. The more the merrier. Reducing interest rates goes against this mandate.
On the other hand the
While free market competition is the desired means to achieve low interest rates, if this is not effective, what next?
This is where government intervention becomes a necessity, be it through new policy interventions or otherwise. At the end of the day, this may be the only way to get the banks to lower interest rates to levels that will be supportive of economic progress. True, going back to central bank setting interest rates may not be desirable, but neither is it the only option available. At the same time, the level of regulation has to be in tandem with the level of market competitiveness. A less competitive market calls for more regulation to achieve the desired price level. Needless to say, three of the six banks that control the market have high government influence, in one way or the other. These banks can be instrumental in influencing the market towards lower interest rates. In some economies, these kind of banks have taken the initiative of lowering rates in order to achieve the desired growth agenda.
The much awaited Kenya Banks Reference Rate (KBRR) has finally been set at 9.13 per cent and took from yesterday. Going forward, all banks will be required to use this rate as the base rate, with a premium based on the risk assessment of the borrower. The interest rate charged on a borrower will therefore be the base plus the risk premium.
Whether this will bring some level of transparency, it is a wait and see situation as well as to whether any meaningful level of reduction in interest rates will be achieved. Perhaps it is just time for the
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