Banks now in a tight spot over cartel-like behaviours

The days for cartel-like practices among banks that have seen them resist change in the financial industry are numbered, if new rules are applied to the letter.

Last week, the Competition Authority of Kenya (CAK) signed a memorandum of understating with the Central Bank of Kenya (CBK) that gives the antitrust watchdog access to information from the lenders and Kenya Bankers Association currently considered confidential and only accessible to the Central Bank.

The MoU was gazetted last week, giving CAK a legal basis to carry out investigations.

For a long time, banks have hidden behind the veil of Kenya Bankers Association to prevent change and fight threats to their huge appetite for huge profits.

CAK Director-General Francis Wang’ombe said the agreement will enable the authority to get crucial information about the industry through CBK.

This, he said, would help the watchdog to address competition concerns in the banking business.

“In the MoU, we have set up a general framework to enforce competition laws and consumer protection. What is causing lending rates to remain high, for example, could be some anti-competitive practices, which we will have to look into,” Mr Wang’ombe told Smart Company.

Banks file monthly and quarterly data with the Central Bank, which monitors almost all transactions done by the lenders through an integrated system.

EXCLUSIVE ARRANGEMENTS

Under section 44 of the Banking Act, banks are required to seek permission from the National Treasury, through CBK, to change any rates or commission levied on consumers.

The competition authority will also seek to access minutes of the meetings of the bankers’ association to find out whether there is collusion among the lenders.

At the moment, the bankers association is battling a multi-billion shillings claim in a case filed by Ms Rose Florence Wanjiru after Standard Chartered Bank hit her with hefty charges. The suit, which could   lead to  huge payments in backdated claims, has been opened for all bank customers with similar grievances to join.

The new deal will see the competition watchdog get vital  data that will enable it to dig deep and unearth any market practices that stifle competition.

Such practices could include price fixing, market segmentation and exclusive arrangements.

If found guilty, banks will pay billions of shillings in penalties as the competition law allows CAK to impose a financial penalty equivalent to 10 per cent of a firm’s annual sales/turnover.

KBA will also be closely monitored. The association holds crucial details of trade agreements, meeting minutes, as well as other shared information among its members. These details will be key in CAK’s scrutiny.

And that is not all. The Kenya Forex Bureaus Association is also set to be investigated by the competition authority.

The success of the exercise will be a big  relief to the millions of active borrowers, whose hopes for cheap credit were shattered after the introduction of the Kenya Banks Reference Rates (KBRR) failed to trigger significant cuts in interest rates.

Interbank transactions, ATM withdrawals and loan transfers are some of the deals that have been made more expensive to deter customers from moving from one bank to another.

The competition authority is also expected to publish yet another gazette notice at the end of this month.

The notice is expected to grant an eight-month amnesty to several trade associations who would dismantle cartels that fix prices of key commodities, hindering competition in the market.

COMPLIANCE PRACTICES

In April, the CAK said commercial banks and insurance companies top the list of entities whose trade associations would be required to align their business with the competition law.

Banking and insurance associations usually enjoy significant clout over their members through several agreements and unwritten deals on how to run their business.

The CAK says the high costs associated with some of the services offered in the market are partly driven by anti-competitive business practices, which sector-specific lobbies have prescribed to their members.

This, the authority says, creates a cartel-like business environment.

“We will issue a gazette notice in June and those who will show sufficient cooperation will receive leniency as opposed to those who will not. Industry associations in the agriculture, banking and insurance sectors will be a great priority as we seek to eliminate anti-competitive tendencies that inflate prices and increase cost of living,” Mr Kariuki said in April at a workshop for journalists.

The authority plans to pursue compliance processes for trade associations aimed at identifying and correcting past conducts, increasing awareness and resolving unintentional contraventions of the law.

The World Bank estimates that cartels make products more expensive by up to 30 per cent through practices such as exclusive agreements and fixing of prices.

The competition authority said it has identified high profile anti-competition trade deals in the beverage business in the past year and it is putting the final touches on a report on the matter and the proposed action to be taken.

“In less than three months, we will announce our findings about such practices in the companies dealing in construction materials where there are some exclusive arrangements especially on tender fixing. The authority will spare no one but early and voluntary compliance is strongly encouraged,” Mr Kariuki also noted.

CAK has since signed an agreement  with the Communication Authority to look into all matters on competition in the telecommunication industry.

For instance, a gazette notice was issued regarding inquiry into Unstructured Supplementary Service Data (USSD) services offered my mobile service companies. This is the platform that allows users to access services such as money transfers or bank account inquiries, credit information, breaking news and other deals, which are charged at different rates through dialling of *numbers# and quite often, calls.

ARTIFICIAL DOMINANCE

Kenya has been bench-marking with South Africa on the administration system that minimises resources needed to track organisations and enforce competition compliance.

Most trade associations are said to be involved in practices that facilitate collusion or result in diminished incentives to compete in certain markets, creating artificial dominance and monopolising price control.

The World Bank trade and competitive global practice officer Sara Nyman said business behaviours that restrict the number of suppliers, especially of cereals, have direct effects in economic growth and poverty.

“Increasing market competition have potential to boost Gross Domestic Product growth by up to 1.8 per cent. In cereals, a 20 per cent fall in maize prices reduces poverty by 1.8 per cent,” Ms Nyman said.

Since its establishment, the CAK has been involved in a number of cases involving mergers and complaints associated with competition among businesses.

Among the cases include the Safaricom versus Airtel and Tuskeys against Ukwala (contested in court).