Can a free interest rates regime be restored after elections?

The cap on interest rates in Kenya has sparked a debate on whether a free interest rates regime could be restored after the upcoming elections. This move by the government to keep borrowing rates low in the domestic market, despite the high inflation rates that would demand otherwise, has had significant implications on the country's financial landscape. Edwin Chui, a Research Analyst at Dyer and Blair Investment Bank, sheds light on the current interest rate regime and the potential for change post-elections. Chui highlights that the political environment surrounding the upcoming elections provides an opportune moment to discuss the repeal or amendment of the interest rate cap law. The public's support for the rate caps, coupled with banks' preference to lend to the government due to its secure nature, has led to a scenario where private sector borrowing has dwindled. As a result, banks are left with excess liquidity, prompting them to invest heavily in government securities. The intention behind the interest rate caps was to promote inclusivity and facilitate greater access to credit facilities for a broader segment of the population. However, Chui points out that the empirical evidence suggests a reduction in private sector borrowing since the enactment of the law. Banks have struggled to find viable investment avenues apart from government securities, given the substantial liquidity at their disposal. In light of the upcoming elections, the uncertainty in the political landscape poses challenges for investors and market participants. While local fund managers are increasingly active in the market, foreign investors are taking a cautious stance. The anticipation of the election outcomes and the subsequent economic policies of the new government could have varying impacts on the financial sector. Despite the prevailing uncertainties, Chui emphasizes the need for a comprehensive review of the interest rate regime in Kenya. He suggests that linking the rate caps to the cost of government borrowing could provide a more sustainable model. Additionally, exploring alternative investment opportunities and encouraging private sector lending could help revitalize the economy and drive growth post-elections. As Kenya navigates through the complexities of its interest rate regime amidst political transitions, stakeholders remain vigilant and adaptive to the evolving financial dynamics. The decision to uphold the rate caps or pursue a more flexible approach will shape the future trajectory of the country's financial sector and broader economic landscape.