Banks accept the interest rate law is here to stay

What you need to know:

  • Co-operative Bank was the first to announce it would extend the new rate to already-existing loans.
  • It appears there will be no court challenges and no grumbling about other institutions like loan apps and microfinance institutions.
  • The law may mean that banks will not be able to extend loans as they did previously, given the risks that they now bear.

After Parliament passed the interest rate-capping Banking (Amendment) Bill brought forward by Kiambu MP Jude Njomo, Kenyan banks made commitments to lower interest rates in line with their own reference rate.

Virtually all the leading banks announced interest rate reductions of 0.97 per cent on all loans, in unison, through quarter-page and half-page newspaper advertisements.

They also announced commitments to directly lend to SMEs, women and youth and to do away with some frivolous bank charges. Yet, after the President signed the Bill, there has been little unity in interpreting the law.

What we have seen is a series of breaking-news announcements from leading banks.

Cooperative was the first bank to say they would avail new loans at the rate that they calculated to be 14.5 per cent. Then CFC Stanbic was the first to announce that they would extend the new rate to  new and already-existing loans. 

Equity was the first bank to extend the new rate to all facilities, including mobile phone loans, mortgages, and even credit cards. While KCB said that its version of M-Pesa loans would comply, CBA had stated that its M-Pesa loans, marketed as M-Shwari, would not.

Indeed, the terms and conditions of M-Shwari loans, introduced in 2012, note that the 7.5 per cent charge is a facility fee and not an interest rate

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But why are there so many "firsts"? As banks try to understand the law, they have accepted that its signing, while political, was irreversible.

It appears there will be no court challenges and no grumbling about other institutions like loan apps and microfinance institutions. Banks are working on the modalities of applying the new law.

The method of communication has also, rightfully, changed; there will be fewer products from banks in the short term, and fewer announcements.

Banks are now communicating, not by newspaper, but via email and letters to their customers, assuring them of their commitment to complying with the new law.

On the savings side, the main change has been a clear distinction between interest-earning and non-interest-earning accounts. In the past, banks had hybrid accounts that carried a mix of interest, bank charges and free services.

On the borrowing side, the recalculation of loans will bring lower interest rates for most people. Repayment amounts may go down, but it’s more likely that the repayment period for loans will be smaller due to the new, lower, rates.

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The law may mean that banks will not be able to extend loans as they did previously, given the risks that they now bear. After all, if you pay depositors seven per cent, can you lend to the government at nine per cent or to the shopkeeper at 14 per cent?

In a recent TV interview, when asked if such reduced lending may lead to fewer jobs at banks, a CEO spoke of efficiencies coming into the sector.  

Certainly, the Kenyan banking sector is much less attractive to new investors than it was before the Bill. The proposal by MPs to keep banking capital low, in order to allow more indigenous Kenyans – and perhaps even some members of Parliament – to one day become bank owners did not make it into the law signed by the President.

As for Mr Njomo, he means well and we wish him the best, but it’s unfortunate that good citizenship is often not rewarded in the political arena.

Joe Donde, who tried to rein in bank charges before Mr Njomo, is out of Parliament and Muriuki Karue, acknowledged as the father of the Constituency Development Fund (CDF), was himself voted out at the next election. He later rebounded as a senator, where there is no CDF.

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