What new bank law means for borrowers

Kenya Commercial Bank group Chief Executive Officer Joshua Oigara at a media briefing at Hilton Hotel in Nairobi on September 1, 2016. Banks may decide to increase the amount of the insurance policy and deduct it from the amount of the loan applied for since it cannot increase the interest rate. PHOTO | SALATON NJAU | NATION MEDIA GROUP

What you need to know:

  • Banks might also reduce their unsecured loans portfolio. This type of loan is popular among women and youth groups and government employees.
  • With the capping of interest rates that limits their income, banks are likely to re-introduce new account charges and minimum balance.

It is not yet celebration time for Wanjiku, even with the signing of the law limiting how much a bank can charge as interest rate on loans.

Although the new law promises to protect borrowers by limiting the lending rate to 4 per cent above the base rate of the Central Bank of Kenya, the borrower should expect a number of reactionary strategies from commercial banks.

Banks are likely to increase their loan processing fees, therefore hurting borrowers.

These are the expenses related to organising the loan for the client.

Banks usually deduct this amount from the loan applied for, hence the balance is credited in the customer’s account.

Banks might also reduce their unsecured loans portfolio. This type of loan is popular among women and youth groups and government employees.

Therefore, youth and women without security would find it even more difficult to gain access to credit.

Three, banks may reduce the amount lent as a proportion of the value of the security.

Banks do not usually give a loan of the same value as the security of the loan.

For instance, if a borrower applies for a loan against a motor vehicle worth Sh1.5 million, the bank may decide to give a loan equivalent to 70 per cent of the value of the motor vehicle.

With the capped rate, the banks may decide to reduce this percentage.

Some borrowers may not be aware that the loans they take from banks are insured and that they pay for this.

This insurance policy charge is in the bank’s small details that borrowers hardly read under the “terms and conditions” section of the loan form.

Banks may decide to increase the amount of the insurance policy and deduct it from the amount of the loan applied for since it cannot increase the interest rate.

This will eat into the loan advanced to a customer.

THE IMPACT
With the capped lending rates, banks are likely to reduce the amount they lend to individuals without security and businesses with unstable sales figures and instead target salaried individuals working in the government or stable companies and businesses with stable sales.

Youth and women without stable jobs or running small businesses will be the losers.

Following the opening up of various financial institutions, banks stopped most account charges.

They also removed the minimum account balance, allowing the customer to withdraw all the money in their account.

With the capping of interest rates that limits their income, banks are likely to re-introduce new account charges and minimum balance.

Foreign banks with local branches may decide to wind up their operations in Kenya as the capping of interest rates will have a profound effect on their income and profit.

The cost of doing business in Kenya is likely to increase, prompting international banks to seek new markets where the interest rate is not regulated and they can charge the rate they want.

The reaction of the banks will depend on how the Central Bank guides them during this era of interest controls.

The Central Bank must find a way to make banks feel at ease and protected.

Mr Obuya is a consultant with Radiant Consulting and Event Management and a lecturer at Mount Kenya University. [email protected].