CBK issues tough warning to banks over introduction of new charges

Banks have been ordered to stop charging ‘illegal fees’ and reclassifying customer accounts.

The latest directive by the regulator comes even as a consumer lobby group filed a class suit against one of the lenders for breaking the law capping interest rate and is demanding refund for extra charges.

And through a suit filed yesterday, Cofek has accused Commercial Bank of Africa (CBA) of circumventing the law by using the term ‘facilitation fees’ instead of interest rates, which is against the consumer interests. Cofek has also sued the market regulator, Central Bank of Kenya.

In the latest notice, the Central Bank Director of Bank Supervision Gerald Nyaoma has served banks with a notice ordering them to reverse any additional fees charged on loan facilities besides putting a stop to reclassification of products with the aim of lifting their fee income.

CBK said a savings, seven day, call or deposit accounts which are not charged any fee may start attracting charges if they are converted to transactional accounts. A situation that seems to be gaining currency in the banking sector. The banking regulator said it had received information that lenders are introducing new transaction fees and redefining interest earning deposit accounts to hedge against the effects of the law capping interest rates.

Mr Nyaoma reckons that while some banks had approached CBK to increase charges, others have arbitrarily introduced new fees or increased existing ones such as insurance premium charges for loans.

“CBK will follow up on a case by case basis, with any institution that may have violated the law relating to approval of charges to face appropriate action,” the circular to banks read.

Revised FEE

Equity Bank is one of the lenders that has reportedly introduced an appraisal fee of between one and three per cent for its mobile phone-based loans dubbed Eazzy Loan and Eazzy Plus. KCB has also introduced a negotiation fee of 2.5 per cent for all loans. It’s not clear whether these changes received the approval of the regulator.

Banks have also been reclassifying accounts to ensure depositors do not enjoy the seven per cent interest income on their deposits as prescribed by the new law. “Any changes in any feature of an approved product without the prior approval of the CBK are illegal. Any changes which may have been effected by institutions without the requisite CBK approval should be reversed,” the circular to banks read in part.

The bank regulator has however given the industry players a chance to amend their terms and conditions in accordance with the law. This will require lenders to explain reasons for any changes and give them a month’s notice before making any alteration.

“Institutions need to amend their respective contracts with their customers to incorporate the new legal requirements on disclosures of charges and terms,” the notice read.

Meanwhile, CBA is facing a lawsuit by the Consumer Federation of Kenya (Cofek) for what it terms as non-compliance with the lending rates on Mshwari service. The lobby also wants the bank to refund consumers for the excess interest it has been charging consumers since the new law capping interest rates came into force last month.

Cofek argues that CBA’s main rivals—Equity Bank and Kenya Commercial Bank (KCB) have already complied with the law but CBA has only chosen to comply with specific sections of the law.

Cofek wants the court to declare the rates charged by CBA as illegal and unconstitutional. “While the 1st Respondent (CBA) is accurate on the applicable savings rate of 7.35 per cent per annum interest on savings, in line with the Banking Act 2016, it deceptively states that lending rate is unchanged at 7.5 per cent “per loan,” the suit reads.

“This fails the compliance consistency between interest on savings and on lending rendering the 1st Respondent liable to selective application of the law ostensibly for reasons other than public and consumer interest,” it adds.

Justice Onguto certified the case as urgent and directed for an inter-parties hearing before Justice Ochieng’ of the Commercial Court on October 10.

CBA has maintained its M-Shwari product is not developed on an interest model and is therefore exempted from the new banking law that caps interest rates. CBA argues that its model levies facilitation fees and not interest charges.