By Duncan Miriri NAIROBI (Reuters) - Kenya's economy will hit the government's growth target of 6 percent this year on the back of private sector performance, the central bank governor said on Wednesday. Patrick Njoroge also told Reuters that a new rule capping commercial lending rates - a move the governor opposed - made setting the benchmark rate more complicated as it was not clear how any rate cut would affect commercial bank lending decisions. The decision to cap commercial lending rates at 400 basis points above the central bank's benchmark rate, now at 10 percent, sent shockwaves through the market and bank shares tumbled. The government said it had to force banks to lower commercial rates, often above 18 percent, after non-legislative efforts failed. Experts said it could stop banks offering loans to the kind of small businesses that help drive growth and create jobs. "The economy is doing relatively well," Patrick Njoroge told Reuters in his office, saying it was on target for the 6 percent expansion forecast by the government. "This is the time for investors to actually place a long term bet on the economy." But he said the Monetary Policy Committee now faced a tougher job determining how policy, such as last week's rate cut by 50 basis points, would feed through into the wider economy since the decision to cap commercial lending rates. "You are not perfectly sure whether lowering rates increases or decreases credit growth. If that doesn't complicate monetary policy, I don't know what does," he said, adding that lower rates could simply encourage banks to shun borrowers deemed more risky even more than before because the returns would be lower. Elsewhere in the financial sector, he said, banks had to boost transparency in accounting and classification of bad debts, and ensure strong board oversight of operations, after three small and mid-tier banks were taken over by the state receiver due to various financial failings in the past year. Non-performing loans in Kenya's banking sector, the biggest in the East African region, with more than 40 licensed banks, rose to 9.3 percent in August from 5.7 percent in December. The rise was partly attributed to stricter reporting requirements. "The landscape is changing. If you want to be a bank in the new landscape, you better change now," the governor said, adding that building a strong financial sector was vital to Kenya's goal of becoming an international financial centre. In a bid to better ensure liquidity is evenly distributed in a market dominated by a handful of banks, Njoroge said the central bank planned to introduce an interest rate corridor either side of the benchmark rate to guide any intervention. "Liquidity management has been complicated by it being very lopsided. Seven banks have something like 80 percent of our liquidity so it kind of messes things up," Njoroge said. Without giving the parameters of the planned corridor, he said if interbank lending rates rose to the top of the corridor it would prompt the central bank to inject shillings, while liquidity would be mopped up if rates slipped to a lower limit. On plans for Chase Bank, one of the three banks which was closed and taken over by the state receiver, he said the process of due diligence was being finalised so another institution would take control. He did not give a date for completion but said the next step was for another bank, institution or group to step in. "Let's say it will offer us a good sense of where we need to go," he said of the due diligence process. (Editing by Edmund and Robin Pomeroy)