Commercial Bank of Africa insists M-Shwari is not subject to new laws

The Commercial Bank of Africa 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.

According to CBA CEO Isaac Awuondo, though its product fully complied by the new banking laws, its model levies facilitation fee and not interest charges.

CBA CEO Isaac Awuondo

He reckoned that if the company is forced to switch to the interest model it will have no option but to shut down its popular M-Shwari product.

The lender says charging at 1.2 per cent as prescribed under the new banking law made no business sense given the high cost of running the service and working funds.

This could hurt the over 16 million users of the product at a time when banks have gone back to the drawing board to re-engineer their business model under the interest controlled regime.

The stand taken by CBA comes at a time when the Central Bank of Kenya (CBK) has refused to clarify on the contentious question on whether or not M-Shwari falls under the new banking laws.

The CBK Governor Dr Patrick Njoroge told journalists on Wednesday that he did not want to be dragged into the debate even though CBK is the implementing organ of the new banking laws.

“I would rather not answer them. In effect that is where the fight is. The point here is...we are not being fair. What we are doing here is if it favours me, I define it in a particular way. As a regulator, I cannot be dragged into that,” he said.

He was responding to journalists’ questions as they wanted to know whether or not M-Shwari falls under the new banking law that restricts lenders to 14 per cent interest charge or about 1.6 per cent per month on loans.

This now leaves consumers at the mercy of banks that chose to interpret the law in their favour.

CBA has been the centre of the storm after it maintained that what it charges on its mobile loan, M-Shwari, is not an interest rate, but a facilitation fee.

The bank, which is fighting to protect M-Shwari from the new laws, has insisted that the 7.5 per cent fee customers are charged is a one-off facilitation charge on the money disbursed. M-Shwari was launched by CBA and Safaricom in 2012, and is currently the market leader, with almost 16 million customers registered on the service. It has been one of the biggest success stories in the sector, pushing CBA into the top tier banks. It has also been a model that has allowed other banks to copy as they go after the risky and downstream loan market, which has been a preserve of loan sharks.

For instance, if you borrow Sh10,000 on KCB M-pesa, one pays an interest of Sh120 compared to M-Shwari, where a borrower has to part with Sh750.

Equity Bank threw the sector in a spin last week after it announced that it would include mobile phone credit among facilities to be regulated by the new law.

This saw KCB make an about turn to follow cue later in the week, announcing via short messages to customers that it would offer mobile loans at 1.2 per cent per month. CBA argued that the tenor of M-Shwari loans is just 30 days, while competing products have longer-term limits.

“M-Shwari, as approved by the regulator, does not attract any interest rates on borrowing. What we levy is a 7.5 per cent facilitation fee. It is therefore not subject to the new provisions of the Kenya Banking Act in that respect. However, we will increase the interest we pay on M-Shwari deposits,” said CBA CEO Isaac Awuondo in a statement.

Other than the difference in the names, M-Shwari operates like other bank loans, and a defaulter is listed under the credit reference bureau just like a mainstream loan.

The move now sets the lender on a collision course with consumers, as it comes at a time when banks are changing terms to ensure the new law capping interest rates does not hurt their bottom line.