The World Bank is warning of severe economic consequences if the government fails to address the interest rates cap crisis.
The World Bank says in a paper analyzing the impact of the interest rates cap that credit to the private sector has dropped from 25 percent four years ago to 2.4 percent as of last December.
The report says Small and Medium sized Enterprises are the hardest hit by the interest rate cap with corporate clients dominating the loan books of all banks.
Pressed by development partners and commercial banks, the national treasury is drafting a law that seeks to repeal the Banking Amendment Act that prohibits banks from pricing their loans above 4 percent of the central bank rate.
A new report by the World Bank says the rates cap has eroded growth in all sectors of the economy, with credit to the private sector dropping by half.
The report says consumer loans share have declined sharply both in the post interest rates cap law by 1.1%, and a further 1.4% after the caps.
Similarly, small and medium sized enterprises loans share has also declined by 0.7%.
The World Bank report says in 2016, access to credit as measured by growth in credit to the private sector was 25%.
However this slowed to 2.4% in December last year, the lowest in over a decade.
The report finds that that all banks, showed a significant shift in lending towards corporate clients at the expense of lending in other sectors such as SMEs, consumer loans and new borrowers.
The proportion of new borrowers receiving credit from banks significantly reduced by over 50% following the interest rate caps, the World Bank says.
These findings are consistent with a September 2017 credit survey conducted by the Central Bank of Kenya, where 54% of respondents confirmed that the interest rate caps had negatively affected lending to SMEs.
The report advises the wider adoption of credit scoring through credit bureaus, more efficient loan foreclosure procedures and greater emphasis on strengthening consumer protection measures to protect borrowers from high interest rates.