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The impact of interest rate caps on the financial sector : evidence from commercial banks in Kenya

Author

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  • Safavian,Mehnaz S.
  • Zia,Bilal Husnain

Abstract

Interest rate caps can have far-reaching consequences on the composition and maturity of commercial bank loans and deposits. This paper carefully documents these impacts on the formal financial sector in Kenya after the recent interest rate caps of 2016. Using bank-level panel data from before and after the caps, the paper identifies a significant decline in aggregate lending, an increase in nonperforming loans, and a change in composition of lending away from small and medium enterprises and toward safer corporate clients. Banks also shifted away from offering interest on current account deposits to preserve their interest margins. These quantitative findings are supported by qualitative evidence through detailed interviews of commercial bank executives, and have important implications for economic growth and financial inclusion.

Suggested Citation

  • Safavian,Mehnaz S. & Zia,Bilal Husnain, 2018. "The impact of interest rate caps on the financial sector : evidence from commercial banks in Kenya," Policy Research Working Paper Series 8393, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8393
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    Citations

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    Cited by:

    1. Cao-Alvira, José J. & Deidda, Luca G., 2020. "Development of bank microcredit," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    2. World Bank, 2020. "Brazil Rural Finance Policy Note," World Bank Publications - Reports 34195, The World Bank Group.
    3. Calice,Pietro & Diaz Kalan,Federico Alfonso & Masetti,Oliver, 2020. "Interest Rate Repression : A New Database," Policy Research Working Paper Series 9457, The World Bank.
    4. Jorge Pozo, 2022. "Interest Rate Caps in an Economy with Formal and Informal Credit Markets," IHEID Working Papers 16-2022, Economics Section, The Graduate Institute of International Studies.
    5. Emre Alper & Benedict Clements & Niko Hobdari & Rafel Moya Porcel, 2020. "Do interest rate controls work? Evidence from Kenya," Review of Development Economics, Wiley Blackwell, vol. 24(3), pages 910-926, August.
    6. Mr. Etibar Jafarov & Mr. Rodolfo Maino & Mr. Marco Pani, 2019. "Financial Repression is Knocking at the Door, Again," IMF Working Papers 2019/211, International Monetary Fund.
    7. McKillop, Donal & French, Declan & Quinn, Barry & Sobiech, Anna L. & Wilson, John O.S., 2020. "Cooperative financial institutions: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 71(C).
    8. María José Roa & Alejandra Villegas & Ignacio Garrón, 2020. "Effects of interest rate caps on microcredit: evidence from a natural experiment in Bolivia," Development Research Working Paper Series 03/2020, Institute for Advanced Development Studies.

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