New Central Bank of Kenya proposal big boon for loan seekers

Central Bank of Kenya has accused banks of using the credit information sharing mechanism negatively as a blacklisting tool. [Courtesy]
From next month, banks will no longer be allowed to charge all borrowers blanket interest rates.

In a new move that signals Central Bank of Kenya (CBK) could be planning for the scrapping of the rate cap, the regulator has drawn a charter that will compel banking institutions to come up with a plan of implementation, including the publication of hidden charges on their loans.

The charter also compels the banks to commit to increasing lending to small and medium-sized business by at least 20 per cent by 2020 from the December 2017 baseline.

The regulator in the draft charter admonishes the banks which have been reluctant to use credit scoring techniques and instead preferring to put all individual borrowers on the same risk bracket. This allows them to charge high-interest rate for personal loans.

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Mystery surveys

 “The use of appropriate credit scoring techniques shall be ascertained by CBK through various avenues, including during on-site examinations and through conducting consumer protection diagnostic exercises like mystery shopping surveys,” CBK said in the draft charter

Lenders have argued that even if the rate cap is reviewed, they would only offer blanket prices for mortgages, secured loans and long-term loans but that they would find it difficult to price an individual.

Instead, they have tendencies of using the credit information sharing mechanism negatively as a blacklisting tool.

This is despite advancement in credit profiling. For instance, Metropol, the biggest Credit Reference Bureau in the country, has developed a loan auction where when you need a facility, you post it on their website and participating lenders can give offers from which the borrower can pick the most favourable rate.

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“When the rate cap came in, we were slowed down, but we are still improving it,” said Metropol when contacted by The Standard. CBK also said despite joining hands with bank lobby Kenya Bankers Association to create a transparency website, some lenders have not yet uploaded their cost of credit.

A good thing

“I do not have the exact figure of the banks that have not complied, but what CBK is asking is that this becomes mandatory to increase transparency,” said KBA boss Habil Olaka.

CBK has ordered banks to develop and submit to CBK a time-bound plan to comply with the charter.

It will then be approved by the regulator’s board within 30 days of the effective date of the charter for monitoring.

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Failure to do so will see the regulator invoked its powers to slap banks with fines of up to Sh5 million, dislodging their boards or management and even instituting other remedial measures granted under its Banking Act gambit.

Mr Olaka welcomed the charter, saying banks would set out milestones while updating the regulator on a quarterly basis.

“It is a good thing putting the set-out measures in force of law. It is a good chance for banks to show they are working towards consumer protection,” said Mr Olaka.

The charter came even as the National Treasury instituted its own consumer protection legislation under the Financial Markets Conduct bill.

The draft law proposes the creation of an authority which will ensure that lenders do not charge or recover from the borrower or a guarantor any amount on account of interest that exceeds the maximum rates as may be prescribed by the authority from time to time.

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