Guest Blog: Capping Banking Interest Rates in Kenya: The Twists and Turns

By Bankelele

About two weeks ago, President Uhuru Kenyatta signed off on the Banking (Amendment) Act 2015 introduced to Parliament by Jude Njomo, the Member of Parliament for Kiambu.

It among other things requires banks and financial insitutions to disclose all bank charges relating to a loan to a borrower, sets the maximum loan charge at 4% above the base rate, and requires interest to be paid on deposits at least 70% of the base rate. The bill also barred people from entering into loan agreements that exceed these amounts and penalizes bank executives and bank insitutions that contravene these clauses.

The move to rein in interests is a journey that has taken almost fifteen years.  It is not yet over yet. While the umbrella Kenya Bankers Association has asked its   members to adhere, about a third of the banks in Kenya have announced that they will comply, and the Central Bank of Kenya that opposed the Njomo bill has directed that non-compliant banks will face penalties, it is not clear how strong the bill will be if it is challenged in a court.

Credit for capping bank charges goes back to then Gem-MP Joe Donde who brought a bill capping potential bank interest and loan charges to an amount not exceeding the loan. His bill amended Section 44 of the Banking act, introducing what was known as the “in-duplum rule” and it came after a period of high interest rates, when people who borrowed modest amounts e.g. Kshs 1 million, found themselves owning the banks colossal amounts, e.g. Kshs 10 million, even after years of paying their loans.

The Donde Bill was cited as one of the greatest threats to banking in Kenya since the Goldenberg years, and one CEO said that retroactive implementation of the in-duplum rule, would wipe out many local banks.

But its’ effect was seen. It made some borrowers question their bank charges and interest rate calculations.  A Donde-related outfit, the Interest Rates Advisory Centre Limited (IRAC) was formed in 2001 and took part in several cases on behalf of borrowers who chose to verify or challenge these amounts of interest of finance charges levied by banks. The IRAC site lists many of them, noting that some cases were dismissed, and in others they got judgment for their clients, and in others, others banks chose to settled out of court IRAC declared that in the several hundred cases IRAC has handled so far, the interest charged by BANKS on loans, overdrafts and mortgages is wrongly calculated in more than 90%.

A few years after Donde, Finance Minister David Mwiraria reinserted the in-duplum in the Banking (Amendment) Bill 2004. While MP’s pushed for that, asking for the rule to be backdated to the 1990; former President Kibaki wanted it to start in 2004 but he in the end declined to assent to it due to the in-duplum rule.

Later on the government gazzetted the Banking Amendment Act (2006) which proposed to among other things, a ban on bank charges within savings accounts and also had the in duplum rule but which would not be applied retroactively. Along with the Finance bill of that year, new banking amendments were partly effected including CBK got to vet the suitability of bank owners, CBK got a deputy governor, banks were allowed to share non-performing loan data with the Central bank, others banks and credit reference bureaus.

Last month, in assenting to the Njomo bill, President Kenyatta noted that Kenyans are disappointed and frustrated with the lack of sensitivity by the financial sector, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns. This is the fourth time that the National Assembly is attempting to reduce interest rates to affordable levels. In the previous two instances, dialogue and promises of change prevailed and banks avoided the introduction of these caps. In those instances, banks failed to live up to their promises and interest rates have continued to increase along with the spreads between the deposit and lending rates.

In signing the bill into law, President Kenyatta noted that he was aware that consequences could include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms.  But he went ahead regardless.

As it is the Act is poorly worded and very vague on what interest rate is the base around which the lending and savings rates are calculated. There is no mention about micro-finance lending, credit cards cooperative lending, mobile banking landing and shylocks – from which thousands if not millions of Kenyans borrow from every year.

Already the Institute of Certified Public Accountants of Kenya (ICPAK), one of the professional groups that supported the Njomo bill, are reported to have asked Parliament to see if they can extend it to SACCO’s, MFI’s and mobile banking services. They said the law also needs to look at transactions charges and insurance charges at banks to truly protect the consumers from banks compensating for lost income through other high consumer charges.

Is this the end of the story? The court is still out.

Posted by Mzalendo Editor on Sept. 9, 2016

Categories:  No tags