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Co-op Bank caps loans at 14.5 per cent, putting pressure on other lenders

By Patrick Alushula | August 27th 2016
Dr. Gideon Muriuki group managing director Co-operative Bank of Kenya

Co-operative Bank of Kenya has become the first lender to comply with the new banking Act by pricing its new loans at 14.5 per cent.

In an internal memo from Group CEO Gideon Muriuki, the lender directed all branch managers and lending units to refresh all loan offer letters to reflect the new changes.

“We advise that pending receipt of full guidelines from our regulator, the Central Bank of Kenya (CBK), particularly on the applicable base rate, all new facilities shall be at a rate not exceeding 14.5 per cent,” said Mr Muriuki in the memo dated August 26. This is expected to pile more pressure on other lenders to cut rates.

Co-op Bank’s move comes only a day after the banking industry lobby, the Kenya Bankers Association (KBA) vowed not to implement the new law until they get clear guidelines from CBK.

Muriuki said the lender’s move is in line with the Banking (Amendment) Act assented to by President Uhuru Kenyatta that sets the maximum interest rate chargeable for credit facility at 4 per cent above the Base Rate set and published by CBK.

“Under Section 2 (a), the Act provides that a person shall not enter into a new arrangement that exceeds the prescribed rate,” he said.

On Thursday, during a press conference, KBA Chief Executive Director Habil Olaka said banks were still in the dark on how to operationalise the law. “We will comply once it (the law capping interest rates) has been operationalised. We will engage with CBK on how to implement it,” Olaka told journalists.

Mr Olaka said banks will need a clarification on whether it is the Central Bank Rate or Kenya Banks’ Reference Rate (KBRR) that will be applied or further still, a totally different rate will be set by CBK.

KBA is also not sure if the law will be applied retrospectively, meaning re-pricing existing loans that may be far below or above the cap. In addition, it wants to know if the cap extends to foreign currency denominated credit.


However, even before all that, Co-operative Bank, which is also a member of KBA, has gone ahead to slash its lending rates in what may be the beginning of credit pricing wars in the country.

 The President’s assent to the Banking (Amendment) Act was received with mixed reaction with many borrowers expecting immediate impact.

In reality, the law is supposed to be gazetted within a week and take another 14 days before becoming operational, assuming there will be no hitches such as litigation. But the decision by Muriuki, who is also a member of the KBA governing council, could swing the rest of banks into action leading to reduced rates even before the end of three weeks.

The half-year results to June 2016 show that the Nairobi Securities Exchange- listed lender made Sh21.47 billion as interest income. Its non-interest income was just Sh6.85 billion. According to the June 2016 average lending rate report compiled by CBK, Cooperative Bank’s interest on personal loans was averaging 16.5 per cent. It was lending to businesses at 22.1 per cent while corporate loans were attracting 17 per cent interest.

Meanwhile, accountants have welcomed President Uhuru’s move terming it ‘a major milestone in Kenya’s financial sector’.

The Institute of Certified Public Accountants of Kenya (ICPAK) Chairman Fernandes Barasa said the Government must now go slow on domestic borrowing and instead negotiate for cheaper loans from external markets to avoid crowding out the private sector.

In addition, it wants the National Assembly to also come up with a bill to cap other financial service providers as well as mobile banking services. “National Assembly need to relook this Bill or generate a new Bill that will deal with the same issues under micro finance, shylocks and Saccos or provide an alternative for vulnerable groups that the Bill intended to protect,” said Barasa.

On Thursday, banking stocks on NSE sunk into red with Diamond Trust bank dropping by 10.7 per cent on the day that saw more than Sh45 billion wiped out. By midday yesterday, the stocks were still posting dismal performance.

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