MPs now want to end hidden loan charges in fresh raid on banks

Banks could soon find themselves in a tight spot again, with MPs planning new changes to the interest rate-capping law.

In a draft amendment to the Banking (Amendment) Act 2016, the lawmakers seek to seal loopholes being used by the lenders to charge interest above the 14 per cent limit.

Public Investments Committee Chairman Kimani Ichung’wa has proposed amendments to the rate cap law, by making it explicit that it caps the annual percentage rate on any facility and not a nominal rate, which allows banks to pile hidden costs.

The new law caps interest rates on loans at no more than four per cent of the Central Bank Rate (CBR), which currently stands at 10 per cent, meaning banks cannot charge interest above 14 per cent.

Through the proposed amendment, the Kikuyu MP now wants to make sure that all charges relating to a loan are included when banks compute the maximum loan interest rate cap.

“A bank or a financial institution shall set the maximum interest rate chargeable on a credit facility at no more than four per cent, the base rate set and published by the Central Bank of Kenya,” says Mr Ichung’wa in the bill’s memo.

Banks have been charging loan processing fees, insurance and negotiations fees to cushion themselves against the effects of the rate-capping law and maintain high interest incomes. KCB has, for instance, introduced a 2.25 per cent negotiation fee levied across all its loan products while Equity Bank charges an appraisal fee of one per cent that also attracts a 10 per cent excise duty.

Other lenders such as Commercial Bank of Africa (CBA), whose product M-Shwari currently has 13 million customers, are using technicalities on their mobile loan facilities.

Not regularised

The lender claims that it charges a 7.5 per cent fee on the loans and not interest. Through the wording, therefore, the bank argues that the law exempts it from capping its rates.

According to Standard Investment Bank’s research team, between 2011 and 2015, the banking industry generated 21.9 per cent of its profits from fees and commission income on loans alone.

For the 11 listed lenders, as at end of September last year, 14.6 per cent of their total profits came from loan processing fees.

Banks say the new law is a sustained attack on the sector, marked by a tough Central Bank governor, strict reporting of bad loans, receiverships and an onslaught by lawmakers that have seen the banking index dip by more than half between June 2015 and January this year.

“In our view, the drop in private sector credit growth to 4.3 per cent year on year, in December 2016 (verses a historical average of more than 16 per cent) is a clear manifestation of an industry under siege,” said Standard Investment Bank.

According to the Central Bank Governor Patrick Njoroge, average lending rates have come down, from 18.18 per cent in June last year, 13.8 per cent in September and 13.65 per cent in November last year.

This may be attributed to State and development financial facilities such as the Industrial and Commercial Development Corporation (ICDC), which cut its interest rates to 13 per cent. However, Governor Njoroge said on Tuesday some loans were still being charged at rates higher than 14 per cent as prescribed by law, especially those in default.

“The point here is the caps were put in place that set a ceiling at 14 per cent. We as Central Bank have monitored to ensure banks are following this requirements and we have worked with the banks to go over loan by loan and we have seen that some are above 14 per cent. These are loans that have not been regularised - the non-performing loans,” he said.

If passed in its current form, the proposed law might also put into question how banks price their mobile banking loans, including M-Shwari, M-Coop Cash, KCB M-Pesa and Equitel.