Consumer body and banks clash over interest rates

From left: Kenya Bankers Association director of communications and public affairs Nuru Mugambi, chief executive officer Habil Olaka and director of research Jared Osoro at a media briefing on the Banking (Amendment) Bill, 2015 at Nairobi Serena Hotel on August 25, 2016. PHOTO | SALATON NJAU | NATION MEDIA GROUP

What you need to know:

  • Consumers Federation of Kenya says law is clear.
  • According to it, rules should apply immediately.

The consumer lobby and banks on Thursday clashed over whether caps on interest rates will apply to loans transacted before the new law.

The Kenya Bankers Association said the existing rates would continue to be in force until rules on capping are published.

“In the interim, the existing loan and deposit account terms will apply,” the association said in a statement.

“The reality is that the Central Bank Rate may change from time to time but now that there is a law and banks don’t make laws, we will have to try and implement it despite the difficulties.

"We highlighted these difficulties but the message we got is that we need to experiment and if it doesn’t work we will reverse. Meanwhile, we have to suffer the consequences of that experiment,” the association’s chief executive, Habil Olaka, told the Nation.

The attorney-general has seven days to publish the Act, which then comes into effect after 14 days.

Most borrowers are on flexible interest rates and the cost of loans varies according to market conditions. The expectation is that they will be moved to the new order once it is in force.

Another issue to be clarified is whether the caps apply for foreign currency denominated credit and mobile-based loans.

The Consumers Federation of Kenya said the law was clear and the caps should apply immediately, including on old loans.

The lobby wrote to President Kenyatta congratulating him and said: “For avoidance of doubt, all formal loans including M-Shwari (existing and new ones) will be pegged at no more than four per cent over and above the Central Bank Rate,” the secretary-general, Stephen Mutoro said.

He said that the loans rate will automatically be reduced to no more than four per cent over and above the Central Bank Rate as soon as it takes effect.

“The Central Bank of Kenya or any entity cannot purport to manufacture ‘rules’ without an amendment by the National Assembly,” he said.  

The Institute of Certified Public Accountants of Kenya praised the President’s decision, saying it was long overdue.

Institute chairman Fernandes Barasa said this would open up credit and urged Kenyans to take advantage of the new law.

‘IS IMPLEMENTED’

“What Parliament should ensure now is thorough oversight to ensure the law is implemented to the letter. Central Bank must also ensure that banks don’t dodge this law that has come to the rescue of people,” Mr Barasa said.

The accountants had thrown their weight behind the Bill, saying banks would have the advantage of committing borrowers to what they can afford, and reduce the default rate.

President Kenyatta signed the Bill into law on Wednesday despite intense lobbying by banks.

Another source of possible conflict could be whether the Central Bank Rate, (the rate at which Central Bank lends to banks), or Kenya Banks Reference Rate, should be used.

Commercial banks have said the law does not specify the base rate for determining the maximum lending cost, hinting at implementation delays.

“It has been assumed it is the Central Bank Rate but Central Bank may opt to use the Kenya Banks Reference Rate or create a new rate,” said Mr Olaka.

The Central Bank Rate is the price at which distressed commercial banks borrow from Central Bank. The rate is reviewed every two months by the monetary policy committee which uses it to indicate to the market the direction it wants commercial rates to take. The rate is currently set at 10.5 per cent.

The Kenya Banks Reference Rate is a standard base lending rate to be applied by bankers on which they are allowed to load an unregulated premium to cater for their cost of funds and profit margin. It is calculated as an average of the 91-day Treasury Bill rate and Central Bank Rate. It is currently at 8.9 per cent,

This means if Central Bank Rate is used, the base maximum lending rate will be 14.5 per cent and if it chooses Kenya Banks Reference Rate it will be 12.9 per cent.

The minimum return offered to depositors will be 7.35 per cent under Central Bank Rate and 6.23 per cent using bank’s reference rate.

The Central Bank and bankers have previously said later is faulty due to the longer time it takes to be reset, which is every six months.

A source in the banks hinted at possible retrenchments.

Savings and Credit Cooperative Organisations (saccos) will, however, not be affected. The Saccos which lend at 12 per cent per month require members to save first before borrowing hence their growth will be a big driver to improvement of savings culture.