We were all in a celebratory mood when the CBK governor announced the capping of interest rates for banks. Some of us (bankers) in hushed tones due to the definite conflict of interest. I was working for a local bank and we mourned that decision for days! How could we meet our targets bearing in mind that loans were our cash cows?
Bank loans have been unaffordable to majority of people for many years, and this new dawn would enable many Kenyans to take development and business loans. This is only an ideal situation. Low interest rates also force banks to vet loans more to avoid the burden of bad debt. In the case of young working class investors, these are some of the effects of low interest rates:
Reduced Buying/ Investment power
The number of relatives and friends who call us for small loans at odd hours has definitely decreased. This is because we have better and more convenient options that do not involve embarrassing ourselves to our peers. These options include; Mshwari, KCB Mpesa, credit cards and bank personal loans. The problem is we usually take these loans for consumption purposes such as fuel, social drinks, holidays amongst other reasons. This in turn reduces our buying/ investment power at the end of the month since loan repayment is prioritised. In most cases, it leads to a cyclic borrowing cycle whereby we work, pay loans, work harder, get promoted and get more loans to sustain our lifestyle. The various small loans – which are highly attractive – reduce our loan limits and thus most investments become unaffordable.
Unaffordable Mortgages and House rent
Nairobi has attracted various investors in the recent past and continues to do so. We can attest to this from the high influx of chinese investors and immigrants from Somali and Sudan. Low interest rates favours people with high purchasing power and in most cases these are foreigners and the upper class Kenyans. When these investors get into the real estate market, the high demand pushes the prices up leading to exorbitant house prices which are unaffordable to most first time buyers both in terms of cash and mortgage limits. Low interest rates are one of the reasons causing rising house prices and rising rents. Despite the mortgages being relatively cheap, the high cost of buying a house and deposit required has meant home ownership is unaffordable for many young people.
Investment Effect
Low interest rates make borrowing cheap and savings unattractive. People saving money in a commercial bank gain lower interest rate. Returns on savings and fixed income investments are low. Long gone are the days that we would go to the bank and deposit money hoping to make good interest. Companies are now advertising cheap loans for consumption products such as holiday loans, TV loans, car loans which do not contribute to the investment basket. These are attractive traps for the young working class if they are not careful since they reduce the investment headroom.
For more insights check out this documentary on youtube: How the rich get richer – money in the world economy | DW Documentary