Kenya's Interest Rate Regime: The Dilemma of Rate Caps and Political Uncertainties

 Cup on interest rates has seen government keep its boring rates on the domestic market. Even low, even though high inflation would demand otherwise. Zoning us to give an outlook of the interest rate regime in Kenya and whether free interest rate regime could be restored after the upcoming election is Edwin Chui, who is a research analyst at Dan Blair Investment Bank. Edwin, good afternoon. Good afternoon. So let's go for this conversation because we've been trying to wrap our minds around exactly where we are now. A few people have suggested that probably after the elections will be a good time to renew the conversation about repealing this law. But where we stand now and just in respect to the latest MPC meeting that we saw, is this a good time to even talk about repealing this law? It's definitely a good time to talk about it because the processes involved would be political. And given the fact that we are going into an election season, it's the best time to actually have the conversations that can only be resolved politically because the cops were introduced through an amendment in parliament. So it would have to go through parliament. A repeal or an amendment would have to go through parliament. But unfortunately it does appear that at least the public asked you in many ways in support of the rate caps. So it doesn't seem to be an incentive enough for any politician to pick up the issue. So the public says in support of that, but the banks are not giving them the money because they're rather lent to government, which is obviously more secure, more guaranteed. Is this a trend that will hold and does government have an appetite to keep the strength going? It's a trend that will continue unless they repeal the rate cap or they come up with a new way of linking the cops to the cost of government borrowing. At the moment there is no such linkage. So it's easier for the government to just borrow at whatever rate they want to borrow. So unfortunately the borrowing appetite is not going to go down because if you look at the manifestos of both political parties, we see all of them intend to either continue to do a new project that will require a lot of money. And then when you look at the infrastructure, it's unlikely to be a trend, whatever government comes and falls. And then when you look at revenue generation, KRE, Kenya, revenue authority is unlikely to be able to meet its target going forward, especially because it's going to be a decline in corporate tax revenue, especially from the banking sector, because the banks are not likely to perform as well. I mean, the situation about the banking space is particularly an interesting one because the whole point was to encourage inclusivity in terms of having a lot more people access to this facility. Is the empirical proof that from the enactment of that law to now we've actually seen a reduction in private sector borrowing? Yes, yes. It's quite clear actually. And maybe the simplest way of looking at it is checking the liquidity ratios of most banks that has gone way high. Some banks like equity bank now have 53% liquidity. The other way of looking at it is how much money they have put in government securities. So banks have always started the needs of money with nowhere to put on. Nowhere to take it. Other than government securities, what would be the other reasonable avenue for banks to put this cash in? Unfortunately, there aren't as many other reasonable avenues available that would actually take the amount of liquidity that they have. There is no other investment out there that is sizable enough to take in that. One thing that may come into play is the possible conversion of debt to equity, debt from the banks to Kenya always. So that would be an avenue, especially assuming they would be expected to lend more. But other than that, other than government, the only other way for banks to really invest that money is to lend. Yes. Is not too much a good place to put their money? For now, it's not a good place to put their money because we still have to know so much more about what went wrong and what could get better as a basis for putting money in. Very quickly, and do you think the markets have fully priced in this election? I don't think so. I don't think the markets are fully priced in this election. It's actually quite a bit of a misnomer actually because we are talking about banking sector likely to underperform this year. But the banks are going up every day. They are higher than they were before the record. So it's a bit of a unique situation we find ourselves in where actually local fund managers are finally going into the market just before the election, even as some foreign investors are living. Usually we have local investors hold back until the election is over. But maybe a high liquidity in the market with nowhere else to put the money house for them to go into the market. So there is really no pricing of their political risk. But it's an aspect that may come in between now and the time we have elections. Very difficult to read this market. Let's live it there. Many thanks for coming in this afternoon. There was Edwin Tree of Dan Blair.

The cap on interest rates has seen government keep its borrowing rates in the domestic market low even though high inflation would demand otherwise. Joining CNBC Africa to give an outlook on interest rates in Kenya, and whether free interest rates regime could be restored after the upcoming election is Edwin Chui, Research Analyst at Dyer and Blair Investment Bank. 

Can a free interest rates regime be restored after elections? 

The cap on interest rates has seen government keep its borrowing rates in the domestic market low even though high inflation would demand otherwise.

Can a free interest rates regime be restored after elections?

Related Videos

Trending Tokens

News Tips

Advertise With Us

Can a free interest rates regime be restored after elections?

SIGN UP FOR OUR NEWSLETTER

DAILY UPDATE

Related Videos

Trending Tokens

News Tips

Advertise With Us

Newsletters