Banks exploit gaps in law to charge high interest rates

Sunday November 03 2019

Some banks are using the gaps in the Banking (Amendment) Act, 2016 to levy higher interest rates. ILLUSTRATION | NATION MEDIA GROUP


Commercial banks are exploiting loopholes in the rates cap law to continue charging interest above the stipulated 14 per cent, even as they push for it to be repealed.

The law introduced on September 14, 2016 stopped banks from charging exorbitant interest rates by capping lending rates to four percentage points above the Central Bank Rate (CBR).

The CBR has remained at nine per cent for most of this year, forcing banks to only lend at a maximum of 13 per cent.

However, some banks are using the gaps in the Banking (Amendment) Act, 2016 to levy higher interest rates.


Mr Wilfred Onono, the managing consultant at the Interest Rate Advisory Centre (IRAC), says most banks charge interest rates outside the law because certain situations were not anticipated when it was drafted.


“When you read the law, the direct understanding is that interest on any loan is the CBK rate plus four per cent, but when we do recalculation, we realise that most banks are charging higher interest rates by purporting to split accounts as capital and arrears accounts,” Mr Onono said.

“Banks are simply telling their clients that arrears can attract a higher interest rate. The Act was drafted simply, so banks are taking advantage by going behind it, and this has been easier for them because the CBK is not interested to enforce the law,” he added.

The IRAC is an organisation that advocates for fairness in lending.

Some banks have introduced charges christened “non-compliance charges”, which is a percentage charged on the outstanding debt at a particular time.


Where loans are not serviced within the set time, banks demand interest above the set rates. Others charge higher interest on overdrafts.

For instance, one bank charges an additional 10 per cent above the interest cap on the loan portion in arrears.

It has notified one of its clients that he is required to pay 23 per cent instead of 13 per cent for the amounts in arrears (default).

A second financier, in one of its statements to a client, has indicated that interest on arrears is being charged at 26 per cent.

Another bank has in its facility letter indicated a default rate of 10 per cent for borrowings in the local currency (23 per cent on default).

While yet another lender, in a statutory notice, indicated a default rate of 2.71 per cent per month, over and above the effective interest rate — translating to 32.52 per cent per annum.

However, Section 33B (1)(a) of the Banking (Amendment) Act puts the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent the base rate set and published by the CBK.


Kiambu Town MP Jude Njomo, who introduced the law through a Private Member’s Bill, before it came into force on September 14, 2016, argues that any lender that charges more than the prescribed four per cent above the CBK rate is committing an illegality.

“It is only that CBK has been sleeping on the job. It’s the regulator and should penalise banks or financial institutions that are violating the law,” Mr Njomo said.

“If CBK was active, and wanted to stabilise interest rates, they would do that. They are the first to fight the capping of interest rates,” he added.

CBK Governor Patrick Njoroge supports calls to repeal the law, saying it is unproductive as it has seen commercial banks collude to deny Kenyans and micro, small and medium-sized enterprises (MSMEs) access to credit.

But Mr Robinson Mirieri, a long-serving banker, argues that when a borrower fails to pay on the agreed date, they deny the lender the freedom of enjoying that money.

Even though the law is silent on how to handle defaulters, they cannot be allowed to continue benefiting if they are not meeting their side of the obligation, he says.


Mr Thomas Manyura, a credit consultant at IRAC, says: “If your account has been overdrawn, does it mean the overdrawn portion should attract an interest rate higher than what has been set out?

My argument is, if you overdraw, it becomes a loan whether you have a loan facility with the bank or not.”

Based on the rate cap law, whatever credit — mortgage, asset finance, overdraft — facility offered by banks, the interest chargeable should be at 13 per cent, he argues.

“It is not clear who is supposed to take the blame for the law that is not being implemented fully. The regulator (CBK) should guide the banks, and where this has been done, the banks need to refund the money,” he added.

The rate cap law was introduced to cushion Kenyans against exploitation and high loan costs.

That, however, did not go down well with banks, which have blamed the law for stifling the growth of small banks and hurting private-sector lending while making it easier for the government to borrow from the domestic market.

The banks said they were unable to price risk in their customer loans. They want to set lending rates based on their own customer-risk assessment.


Currently, banks have shunned lending to the private sector, particularly MSMEs, which they consider high risk. A majority have channelled their funds to risk-free government securities.

Last week, a parliamentary committee agreed with President Uhuru Kenyatta that the interest capping law should be repealed.

The decision by the National Assembly’s Finance and National Planning Committee is in line with the President’s recommendations in an October 16 memorandum sent to the House, detailing the reasons for his refusal to sign into law the Finance Bill, 2019.

MPs opposed to the position taken by the President say that if the rate caps are removed, banks will exploit the public and the interest rates will go up to 25 per cent.

They say the reason for the decline in private sector credit growth is the government’s excessive borrowing from the domestic market.

In an amendment to section 33 B of the Banking Act, lawmakers wanted to have the caps maintained and only sought to have the law amended to align it with a High Court ruling in March that the rate cap law was unconstitutional.


High Court judges Francis Tuiyot, Jacqueline Kamau and Rachel Ngetich gave MPs 12 months to reconsider their positions on the provisions of the Banking (Amendment) Act No 25 of 2016, which introduced Section 33B into the Banking Act (Cap 488 of the Laws of Kenya), capping lending rates.

On Tuesday, MPs will vote on whether the law should be repealed or not.

In court, Tsusho Capital Ltd, the trading and investment arm of the Japanese multinational Toyota Tsusho Group, has been dragged into the controversial rates debate.

Consumer Federation of Kenya (Cofek) claims Tsusho Capital has failed to drop the lending rates from 22 per cent to 14 per cent even after the Banking (Amendment) Act became law in September 2016.

Cofek wants Toyota Kenya Ltd made liable to compensate buyers who have been paying car loans using the high interest rates.

Tsusho Capital Ltd argues that it offers vehicle financing facilities to customers but it is not a bank and is, therefore, not regulated by CBK guidelines on lending and or interest rates capping.