Banks ordered to stop charging borrowers new transaction fees

Central Bank Governor Dr Patrick Njoroge (Centre) flanked by CBK directors Gerald Nyaoma (Left) and Charles Koori (Right) during a Senate Finance Committee hearing on July 27, 2015. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

In Summary

• Financial institutions are obliged under the law to amend their respective contracts with borrowers to incorporate the new legal requirement on disclosure of charges and terms.
• The Banking (Amendment) Act 2016 sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR) and sets the minimum return payable on customer deposits at 70 per cent of the CBR.

By BRIAN NGUGI, bngugi@ke.nationmedia.com

Commercial banks have been asked to immediately stop charging their customers any new levies introduced following the coming into force of a new law capping interest rates.

Central Bank of Kenya’s (CBK) director in charge of Bank Supervision Gerald Nyaoma says in a circular to chief executives of commercial banks and mortgage finance companies that the regulator has in recent weeks received numerous applications from banking institutions seeking approval to increase charges on products.

The letter, dated October 3, also says that the CBK has received mounting complaints over ongoing introduction of new arbitrary charges since the Banking (Amendment) Act 2016 came into force on September 14, whose effect is to nullify any gains to customers of the new law capping interest rates.

“The CBK has also received a number of complaints from bank customers stating that their banks have imposed arbitrary charges or unilaterally converted their savings accounts into transactional accounts, and thereby losing the benefits that were accruing from their savings accounts,” Mr Nyaoma says in the circular.

The letter, which is copied to Kenya Bankers Association (KBA) chief executive Habil Olaka, declares the new fees illegal, and reminds bank CEOs that any change in any feature of an approved product without prior approval of CBK is also illegal, adding that any bank executive acting in breach of the law faces hefty fines and sanctions, including loss of operating licences.

READ: CBK warns banks against charging borrowers new fees

“Any changes which may have been effected by institutions without the requisite CBK approval should be reversed immediately,” the circular says – meaning banks that have converted their customers’ savings accounts into current accounts must reverse the action.

“Any conversion of a savings, seven-day or fixed deposit account product to a transaction account by any institution should be reversed immediately.”
Mr Nyaoma says banks and institutions that violate the new law will face harsh sanctions including hefty fines and even loss of bank licenses.

Case by case basis

“The CBK will follow up, on a case by case basis, with any institution which may have violated the law relating to approval of charges and products and appropriate action shall be taken against the affected institution,” says the circular.

Financial institutions are obliged under the law to amend their respective contracts with borrowers to incorporate the new legal requirement on disclosure of charges and terms.

Reports of the new tactics by banks have elicited sharp reactions from proponents of the interest rates capping law who have been asking the CBK to act.
Jude Njomo, the architect of the new law, said Parliament had taken note of calculated efforts by banks to charge high interest rates through the back door.

“I am aware that the Central Bank has issues a warning but I would like it, as the industry regulator, to stamp its foot down and ensure no Kenyan is exploited,” he said.

Consumer lobby, the Consumers Federation of Kenya (Cofek), has faulted the CBK for failing to immediately crack the whip on rogue banks breaching the law.

“The Central Bank of Kenya has no business reminding people to follow the law. It has a business to crack the whip. What we expected from Central Bank was that Bank “X” or “Y” is not doing this and these are the sanctions or that they show cause why this should not be done,” said Cofek secretary- general Stephen Mutoro in an interview adding that the CBK’s message is akin to reminding the banks not to be caught pants down.

The Institute of Certified Public Accountants of Kenya, (Icpak), which is among the professional agencies that backed the law, said Kenyans were keenly watching the regulator’s actions to see whether it will abdicate its role as regulator.

Mr Mutoro urged Kenyans to be vigilant in their dealings with banks insisting that some banks were taking advantage of their customer’s ignorance of the new law.

The Banking (Amendment) Act 2016 sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR) and sets the minimum return payable on customer deposits at 70 per cent of the CBR.

Hard–earned deposits

The CBR currently stands at 10 per cent, meaning that banks are barred from charging interest on loans above 14 per cent.
While signing the new law President Uhuru Kenyatta urged banks “to do more to reduce the cost of credit and ensure that benefits of the vibrant financial sector are also felt by their customers.”

“Since receiving this Bill, I have consulted widely and it is clear to me from those consultations that Kenyans are disappointed and frustrated by the lack of sensitivity from the financial sector, particularly banks. These frustrations are centred around the cost of credit and the applicable interest rates on their hard–earned deposits. I share these concerns,” said Mr Kenyatta.

The President’s surprise decision was expected to usher in the era of cheap credit for borrowers and declining profits for many banks.
His decision to assent to the law immediately struck a chord with the majority of Kenyans, most of whom said had been locked out of the credit market either due to prohibitive interest rates or were reeling under the weight of high rates.

Mr Nyaoma cited Sections 16A (1) and 44 of the Banking Act and Section 31A of the Banking (Amendment) Act, 2016 as well as regulations 2 and 7 of the Banking Regulations, 2006, which outline the process that banks must follow in event that they want to increase lending rates and other charges.
Provisions of the Banking Act demand that savings, seven day, call and fixed deposit accounts do not attract any charge. They also require all products sought to be offered by any bank to be approved by the CBK prior to roll out.

Besides, banks are required to seek CBK approval for any proposed change to and/or in any feature of an approved product.

“Each product has its own unique features. It is these features that constitute the product which must be approved by CBK,” the law says and goes on to explain that “approval by CBK of a product means approval of the features of the product as described by an institution to the CBK.”

It says any change in the features of the product as earlier approved as earlier approved and therefore the changed product with less, more or otherwise varied feature(s) must be approved by CBK prior to roll out.

bngugi@ke.nationmedia.com