By Kamami Christine Michira Mweti, Bowmans Kenya
Kamami Christine Michira Mweti at Bowmans Kenyaexplores the significance of Kenya’s Banking Amendment Act which came into force in September 2016.
Kenya’s real interest rate spread, among the highest in the world, has been a source of great public concern. Rightly or wrongly, the spread has been blamed on avarice on the part of banks. Recent collapses in the sector largely attributed to poor corporate governance have reinforced this perception and added fuel to the fire.
Understandably, over the last 20 years, there have been many attempts to reduce the spread by way of regulation. One of the best known is the Central Bank of Kenya (Amendment) Act 2001 (the Donde Act). This sought to link interest and deposit rates to the 91-day Treasury Bill rate by requiring the Central Bank of Kenya to ensure that the maximum interest rates charged for loans by banking institutions was no more than 4 per cent above the 91-day Treasury Bill, while deposits on deposits would be no less than 70 per cent of the rate paid on the 91-day Treasury Bills. The Donde Act was following enactment and before implementation challenged declared illegal by a court on a technicality regarding its commencement. The Public Finance Bill of 2012 was similarly unsuccessful in its attempts to regulate interest rates.
All these attempts had the same intention, to protect ordinary Kenyans. In March 2016, during a parliamentary debate on this topic, it was stated:
“Sometimes the national good must be considered above individual interests. Our national interest is to grow the economy. If we allow banks to operate the way they are doing then our economy cannot grow as fast as we would expect because the number of people who can access funds will be reduced … We must bring sanity once and for all to the banking sector to propel our economy … There is no correlation between what you get in terms of the money you are saving and what they charge you in terms of the money they are lending you.”
The recent successful effort to address this matter, the Banking Amendment Act 2016, came into operation in September 2016. The Act provides that banks shall not charge more than “4 per cent – the base rate set and published by the Central Bank of Kenya (CBK)”.
The CBK has subsequently published the Central Bank of Kenya Reference Rate (the CBRR). The CBRR is currently at 10 per cent, bringing the maximum interest chargeable on a credit facility to 14 per cent.
The CBRR is published by the CBK on its website pursuant to Section 36(4) of the Central Bank of Kenya Act, Chapter 491. The level of the CBR is reviewed and announced by the CBK’s Monetary Policy Committee (MPC) every two months. The CBK has provided banks with forms for disclosure of interest rates levied by banks on an aggregate monthly basis.
In addition to the floor on deposits and ceiling on interest rates, the Amendment Act requires banks to disclose charges, terms and conditions related to a loan to a borrower, before granting the loan, provisions similar to the stipulations outlined in the Consumer Protection Act. The Amendment Act does not address the variations of terms and conditions after the loan has been granted, however. It is expected that the CBK will in due course provide guidelines on the depth and breadth of the disclosures required.
The Act applies to Kenya’s banks and financial institutions. As the amendment has been made to the Banking Act, it excludes microfinance institutions, savings and credit organisations, and mobile money service providers, among others, from its application.
In addition, the term “credit facilities” is not defined in the legislation and therefore ordinary meaning applies. In day-to-day terms, this means any form of advancement of loans to clients including credit card services. The cap on interest rates introduced by the Act could therefore apply to any facilities extended by banks regardless of the size or nature of the facility or the borrower.
The floor rate on deposits held “in interest-earning” accounts is set at a minimum of 70 per cent, the base rate set and published by the CBK. The term “interest-earning” is not defined. Banks are therefore addressing this on the basis of the contractual terms with depositors on a case by case basis.
The CBRR does not apply to currency other than the Kenya shilling. It is, therefore, unclear how loans and deposits in foreign currencies would be dealt with as they are not specifically excluded from the application of the Act. In addition, loans made by foreign lenders and other non-bank lenders are not caught by the Act.
The Act prohibits any person (not just banks) from entering into a contract to borrow or lend money in contravention of the Act. The purpose of this is to ensure compliance by otherwise unregulated persons such as borrowers.
The Amendment Act does not specify the consequence of non-compliance by borrowers but it provides a penalty of a fine of not less than 1 million Kenyan shillings or imprisonment for a term of not less than one year (or both) for chief executive officers of banks that contravene the provisions of the Act.