Controlling bank interest rates will stop exploitation

The Central Bank of Kenya. A proposed law seeks to compel banks or financial institutions to disclose all charges and terms relating to a loan to a borrower. PHOTO | FILE 

By JUDE NJOMO

In Summary

• It is ill-advised for Kenyans to entrust a KBA member banker with financial wellbeing.

I wish to respond to concerns raised by Mohammed Wehliye’s article in the Business Daily on March 19, 2016, that poured cold water on my proposed Banking (Amendment) Bill, 2015.

My proposed law to regulate interest rates is of unique standing. It speaks to the general welfare of the citizenry.

It principally intends to provide a mechanism for regulation of banks and financial institutions’ interest rates through the introduction of ceilings.

It proposes to put a cap on the rate of interest charged on loans and to fix the minimum rate of interest that these institutions must pay on deposits.

The Bill seeks to amend the Banking Act by introducing a new Section 31(a) that requires banks or financial institutions to disclose all charges and terms relating to a loan to a borrower. This is the most fundamental aspect of the proposed law.

For far too long, many bank customers have experienced obnoxious charges on their loans that they were initially not aware of, leading to their inability to service their loans hence the consequent raise in non-performing loans, which stood at a whopping Sh107.1 billion in 2014.

The proposal further seeks to introduce amendments to Section 33(b) of the Banking Act, which will set the maximum interest rate chargeable by a credit facility at below four per cent of the base rate set by the Central Bank of Kenya, and guarantees a minimum interest rate of at least 70 per cent of the base rate set by CBK.

These proposed provisions, if passed by Parliament, shall go a long way in safeguarding interests on loans intake, while protecting clients’ deposits.

Any bank or credit facility that intends to charge more than the proposed four per cent beyond the Central Bank Rate, shall be operating against the welfare of its clientele.

Consequently, an institution intending to pay depositors less than 70 per cent above the Central Bank Rate is out to bleed its industrious clientele dry.

It is for this reason that the Bill proposes a strict penalty of a fine not less than Sh1 million or imprisonment for a term not less than one year for such exploitative institutions.

Kenya can never be further from reaching its Vision 2030 goal than when wallowing in a banking regime that promotes super profits for the banking industry, and modest profits or even losses for their entrepreneur clientele.

It is appalling that in the last few years, seven out of the 10 highest earning companies in Kenya, are banks. The argument that regulating interest rates will push scale-entrepreneurs to oblivion holds no water.

In fact, this cadre of businessmen long shunned banks and have been confined to borrowing from chamas due to the former’s skyrocketing interest rates.

The reference to this Bill as a knee-jerk reaction is preposterous. The imminent failure by the Central Bank and the Treasury to cushion Kenyans from economic oppression by banks informs the need for a legislative recourse. Only Parliament, exercising its role of representation has attempted to stop this exploitation.