The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Emre Alper, Benedict Clements, Niko Hobdari, and Rafel Moyà Porcel
INTERNATIONAL MONETARY FUND
This paper reviews the impact of interest rate controls in Kenya, introduced in September
2016. The intent of the controls was to reduce the cost of borrowing, expand access to credit,
and increase the return on savings. However, we find that the law on interest rate controls has
had the opposite effect of what was intended. Specifically, it has led to a collapse of credit to
micro, small, and medium enterprises; shrinking of the loan book of the small banks; and
reduced financial intermediation. We also show that interest rate caps reduced the signaling
effects of monetary policy. These suggest that (i) the adverse effects could largely be avoided
if the ceiling was high enough to facilitate lending to higher risk borrowers; and (ii)
alternative policies could be preferable to address concerns about the high cost of credit.