What The Signing Of The Banking Amendment Bill 2015 By Uhuru Means To You.

President Uhuru Kenyatta signing the Banking Amendment Bill 2015 into law in a confident move to cap ballooning interest rates.

President Uhuru Kenyatta on Wednesday finally assented to the Banking Amendment Bill 2015 that will regulate both loan and deposit rates and include a loan rate cap of 4% above the central bank’s benchmark rate (CBR), currently at 10.5%, and a floor on deposit rates of 70% of the CBR.

In making his decision, President Kenyatta argued that banks failed to show goodwill having never followed through with promises to address the high cost of credit.

The Act has introduced consumer protection measures for borrowers and savers through instruments that are intended to reduce the discretion of the banking and financial institutions in interest charged for loans and also for the interest payments for savings.

Banks had gained a stranglehold on Kenya’s lending market, rendering it non-competitive with devastating consequences on the economy through their cartel-like behaviour.

What exactly does this bill entail?

The first implication is that it will ensure that a bank or financial institution offering a loan to a borrower is compelled to disclose all charges and terms related to that loan, thus ensuring greater disclosures and knowledge on the part of borrowers about the full terms of the loan and especially any penalties and charges that are not always clear in loan agreements.

Secondly, it restrict banks from setting their own interest rates for loans making it easier for the borrower to predict the maximum interest on a loan to be provided using the base rate as declared by the Central Bank.

For example, if one borrows sh. 50,000 and the base rate is set at 10%, therefore the total interest to be paid within a year should not exceed sh. 7000 per year because the maximum interest rate can only be 14%, which includes the base rate at 10% and the maximum of 4% points above that.

What the bank are currently charging Kenyans.

Section 33B (1) (b) of the Banking Amendment Act implies that any Kenyan with a savings account in a bank will receive a predetermined interest rate on the deposit. Here too, the reference rate is the base rate set by the Central Bank of Kenya.

This clause sets the minimum interest rate that a bank would pay for a savings deposit at 70% of the base rate set by the Central Bank of Kenya. For illustration, if the base rate was set at 10%, then the minimum amount payable for savings account would be 7% interest on savings.

Under the new changes, chief executive officers of the country’s banks will be imprisoned for terms not less than one year for breach of new regulations.

Opposition against interest controls is premised on the grounds that it is likely to wipe out credit and conversely lead to the emergence of shadowy and informal loan sharks with exploitative and prohibitive lending rates. This law has sparked a lot of heat with the Kenya Bankers Association (KBA), the umbrella body of commercial banks saying that a cap on interest rates is unlikely to benefit a majority of the banking population. They claimed that interest rate control world over has never led to easy access to credit.

Kenya Bankers Association Chief Executive Habil Olaka is on record saying that banks will be forced to prioritise low risk borrowers. A low risk borrower is one who is likely to repay their loans in full and on time like cooperates and the government among others.

KBA said that 40% of the borrowers were considered moderate, high and very high risk clients who would not benefit from interest rate caps. These were people who borrowed Sh. 200,000 or less. The likely scenario, according to banks, is that Sh18 billion in personal loans will be inaccessible with the move to control interest rates.

“High risk borrowers will now face more obstacles in getting loans. If your risk is higher than the 4 percent cap that is now in the law, it will be hard for a bank to give you a loan, most small and micro finance companies fall in this category and they are the backbone of the economy,” Olaka observed.

Nevertheless, Kenyans need not lose a wink of sleep by these threats. The fightback move by these banks will definitely open a gap where small financial lending institutions such as SACCOs fill in and maximise the fallout to their own advantage. Those who will exploit this opportunity will reap great as word about the ‘rescue’ will spread like bushfire amongst the so called high risk clients.

Mobile money banking such as M-PESA will obviously ‘eat’ into the banking sector.