Interest Rate Capping: Muthoni Thang'wa an Innocent Victim of the Dunning-Kruger Effect

One of the luminaries in Kenya’s financial sector recently wittily quipped that on the subject of interest rate capping “everyone and his/her cat” has an opinion. And he was right.  Ms. Muthoni Thang'wa has very strong opinions on the matter as expressed in her Op-Ed in today’s Daily Nation.

Ms. Thang’wa’s short bio in the Daily Nation indicates that she “works in the heritage sector, specialising in culture and enterprise”. That does not deny her the right to have an opinion on this subject. It however makes one wonder whether she knows what she is talking about when she asserts thus:

“It has been proven, economically and mathematically, that banks will make profits on loans at the current regulatory rate of 14.5 per cent, yet they charge up to 11 per cent more than this rate. This greedy difference is what this law seeks to regulate”.

On this I can only ask one question: where is the study? I suspect that there is no study she or any person of her persuasion has done of the matter. If there was such study, she could have been all over town with it.

But then again I know how those who earn a living out of pontification operate. They simply take leave of logic and reason if that will come between their preconceptions. In other words they have attitudes that they desperately seek to justify through sounding profound but not making any sense.

It gets juicier when Ms. Thang'wa argues thus”.

“All the players in the financial sector take the public for granted; none of them had any research or data that supports any of the claims they used to oppose the Bill, including inefficiencies in the credit market and credit rationing”.

Really? No studies? I argued yesterday that there is a group of people whose arguments on this subject can be characterised as “accidental expertise”. If Ms. Thang'wa is the reading type, she can see the link on my blog post to a World Bank Paper that could easily rubbish the arguments in her Op-Ed.

Let me make it easier for her by saying that the financial sector knows a lot on this subject than she imagines. And that knowledge is based on experience and, yes, research.

Let me not speak to experience because that is a subject on its own that portrays Ms. Thang'wa’s attitude seeking dubious justification. Such attitude is such that:

(a) she knows more on the subject than the Central Bank of Kenya (CBK) which has opposed the capping of interest rates as a way of addressing the structural issue of high interest rates
(b) she knows more than the National Treasury, on the subject whose view on the matter is the same as the CBK’s
(c) she knows more on the subject than the Deputy Managing Director of the International Monetary Fund (IMF) who recently argued that “Another challenge facing many African countries is the persistence of very high spreads between the interest rates offered on deposits and those charged on loans. This has led to understandable frustration among borrowers about the cost of credit, and has produced political pressure for interest rate controls. However, the politicization of monetary policy bears well-known risks—for the soundness of the financial system and for credit access, notably higher-risk borrowers. International experience suggests that, in many cases, interest rate controls may actually end up reducing access to the banking system for small borrowers—such as farmers, SMEs and consumers—and may also revive informal lending at much higher cost for borrowers”.       

Instead let me speak to research conducted by the financial sector in Kenya.

·         We know through research that the Kenyan banking industry exhibits strong competitive attributes. So if interest rates are sticky at high levels it has less to do with competition and more to do with exogenous factors such as huge government fiscal deficits financed through domestic borrowing. That study is available here.

·         We know through research that the challenges that exists in the interbank market (yes, no assumptions here that Ms. Thang'wa knows that there is a credit market amongst banks!) are structural and could be compounded by capping of interest rates. That study is available here.

·         We know through research that banks are strategically positioning themselves to support capital markets deepening through their investment banking subsidiaries; therefore strategically they are diversifying away from interest income towards entrenching transaction and advisory based income. That study is available here.

·         We know through research that the challenges of SMEs are wider than financing, although Thang'wa et.al. would want to make it appear that finance is the only problem of SMEs. That study is available here.

I can go on and on and on about the studies on matters finance, banking and economic policy by researchers in the financial sector, but I guess it cannot help persuade Ms. Thang’wa to move an inch from her jaundiced view. I need to say this though. The fact that she doesn’t know about the existing research does not excuse her empathic assertion that there is no body of knowledge on this subject and more.
What it does it bringing out the possibility that Ms. Thang’wa could be an innocent victim of the Dunning–Kruger effect, which is a perception bias whereby low-ability individuals suffer from illusory superiority, mistakenly assessing their ability as much higher than it really is.