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they push for it to be repealed.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.
EXTRA CHARGES
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.
DEFAULT RATE
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.
ENFORCEMENT
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.
RISK ASSESSMENT
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.
PRIVATE SECTOR HURTING
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.
MPs VOTE
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.
No comments:
Post a Comment