How sly banks plotted to avoid paying interest on your deposits

Banks hatched a clever plan to avoid paying interest on your deposits in the wake of the rate cap law, a new report shows.

The lenders defied the regulator and changed interest-earning deposit accounts into transactional accounts to shield themselves from the deposit rate imposed by the Banking Amendment law.

A review by Standard Investment Bank on supply of money showed that the value of interest-earning accounts contracted by Sh176.23 billion to Sh1.017 trillion in the wake of the new law, levels last seen in 2014.

“Review of money supply shows contraction in value of banks’ savings and time deposits following passing of interest rate controls. Between August 2016, when new law controlling interest rates was enacted, and December 2016,” SIB said in the report.

Call deposits, kept for seven days, used to attract a rate of about one per cent for most accounts, meaning lenders were giving Kenyans a return on their money even when they frequently deposited and withdrew money.

However, with the rate cap, the law pegged rates of deposit at seven per cent in what should have translated into a boon for savers. Banks were, however, ahead of the game and moved swiftly to convert their customers’ accounts into transactional non-interest earning accounts without their knowledge.

Some who had fixed deposit accounts were automatically downgraded to transaction accounts if they withdrew money more than twice.

CBK Govenor Patrick Njoroge had warned that once the accounts were converted, they should not attract additional charges.

The banking regulator said it had received information that lenders were introducing new transaction fees and redefining interest-earning deposit accounts to hedge against the effects of the law capping interest rates. He also ordered banks to make the changes after consulting customers first. But Kenya Bankers Association Chief Executive Habil Olaka said banks had no way to survive but to adjust where the deposit rate applied. “Call deposits have dried out of the market within three months. They have been moved to current accounts, which are not attracting any interest,” said Mr Olaka.