New law is an overreach by lawmakers and is unlikely to dent bank profits

President Uhuru Kenyatta gave an express assent to the Banking (Amendment) Bill of 2015 and by that constitutional action made it law.

In short, this law was passed by Parliament some weeks ago and introduced three new clauses into the Banking Act.

By the act of presidential assent, this law requires banks and financial institutions to disclose all charges and terms relating to a loan, which is an unequivocally positive policy stance.

The less salutary clause is 33 (b) that provides a maximum of four per cent premium for loans above the base rate to be published by the Central Bank of Kenya and this is intended to provide predictability for borrowers.

On the side of savers, the same law under 33 (B) (b) sets the minimum interest to be paid for a saving product at 70 per cent of the same base rate above.

Also consequential is the clause that forbids either a client or bank from departing from the lending structure that is set above and underlines this with a criminal sanction of at least Sh1 million or a jail term of a year or a combination of fine and incarceration.

The criminal sanctions only apply to the bank or agent and not the borrower.

OVERREACH

My assessment was that the President would not take the constitutional route of a direct assent owing to the waffling language that issued from the State House spokesman and which added to the strong, if not altogether coherent, argument that the Kenya Bankers Association put forth.

My view is that this Bill represented an overreach by the Legislature to punish banks for intransigence on this issue even while the lawmakers were aware that it would not necessarily reduce the cost of credit and expand bank lending to small borrowers in whose name the law is being passed.

It is worth considering the immediate effects of the news about this law and how banks would respond to this.

Presidential assent here may imply that the Executive has chosen to avoid a service return with the Legislature and called their bluff, allowing the law to pass with the expectation that members of the National Assembly will take responsibility for its effects. So let us explore what could happen after this.

Contrary to what respected pundits have stated, I am unconvinced that bank managers and owners are quacking in their boots thinking that their meal tickets have been taken away.

I suspect that there will not be an adjustment to the shares of leading banks as many Kenyans anticipate.

ALTERNATIVE SOURCES OF FUNDS

The reason for this is that a keen observation of the declared accounts of banking institutions shows that many of them have been shrinking their lending books while simultaneously seeing profits rise. Banks have reduced their dependency on loans.

Banking managers who have to live with the passage of this law will probably hasten their exit from lending income and expand alternative sources of funds.

These institutions will get creative with other charges, including withdrawal charges from Automated Teller Machines.

Trading of public debt in the form of Treasury Bills and Bonds is among the lucrative and risk-free sources of income for the leading banks and other financial institutions.

The Banking Amendment Law does not touch on this at all, meaning that it remains a good avenue for banks’ income.

Knowing the extreme borrowing that the public sector has been carrying out, it is clear that financial institutions have wide scope for income away from direct lending to individual clients.

The public sector borrowing from the domestic borrowing is at Sh660 million per day.

Strategy teams and the policy analysts within banking institutions will not have failed to notice that this new law is tightly concerned with direct credit to borrowers and with the interest rates paid to interest-earning accounts.

LARGE DEPOSITORS

A cynical strategist would conceive this as meaning that the obligation to pay interest for accounts rests only with savings accounts and not checking or current accounts. A cynical bank could resort to converting all deposits into cheque or current accounts for which no interest is paid.

This means that such an institution would pay no interest for any deposits and rely on large deposits from corporations that hold significant sums in accounts for extended periods. From an operational side, a strict reading of the law would present difficulties for implementation.

For instance, clause 33(B) (a) reads “the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent, the base rate set by the Central Bank of Kenya”. 

A strict reading suggests that this number will be only four per cent of the base rate, which at 10 per cent would mean that it is mathematically 0.4 per cent.

The advocacy by those who supported the law shows that the intended effect was a four percentage point added to the base rate which would make it four per cent plus 10 per cent.

If not corrected, financial institutions could argue sensibly that this part of the law is incapable of being implemented considering that that rate would be far below the inflation rate.