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New banking law to protect Kenyans

COMMENTARY
By Jude Njomo | March 22nd 2016

NAIROBI: Human beings are, more often than not, averse to change. My proposed law to regulate interest rates is unique. The Banking (Amendment) Bill speaks to the general welfare of the citizenry.

It principally intends to provide a mechanism for regulation of banks and financial institutions’ interest rates through the introduction of ceilings.

It proposes to put a cap on the rate of interest charged on loans and to fix the minimum rate of interest that these institutions must pay on deposits they receive from their customers.

To Bill seeks to amend the Banking Act by introducing a new Section 31(a) that requires banks or financial institutions to disclose all charges and terms relating to a loan to a borrower.

For far too long, many bank customers have discovered obnoxious charges on their loans that they were initially not aware of, resulting in their inability to service their loans hence the consequent hike in non-performing loans, which stood at a whopping Sh107.1 billion in 2014.

The proposal further seeks to introduce amendments to Section 33(b) of the Banking Act, which will set the maximum interest rate chargeable by a credit facility at below 4 per cent of the base rate set by the Central Bank of Kenya, and guarantees a minimum interest rate of at least 70 per cent of the base rate set by CBK. These proposed provisions, if passed by Parliament, will go a long way in safeguarding interests on loans intake, while protecting clients’ deposits.

The reference to this Bill as a knee jerk reaction is preposterous. Nothing can be further from the truth. The imminent failure by the Central Bank and the Treasury to cushion Kenyans from economic oppression by banks informs the need for a legislative recourse.

In the year 2000, the then Gem Member of Parliament Joe Donde introduced the Central Bank of Kenya (Amendment) Bill 2000, at a time interest rates in Kenya were among the highest in the world-at 24 per cent.

The resultant end was that 36 per cent of loans issued by banks were non-performing. The Bill, popularly referred to as the Donde Bill, was passed by Parliament in December 2000, but was rejected by the then President Moi who referred it back to Parliament with a recommendation for further amendment.

Though it was later amended and assented by the President to become law in August 2001, there emerged a technical oversight because its commencement date had been indicated to be January 2001. Resultant court cases made it impossible to implement the Act.

In 2012, Hon Jakoyo Midiwo proposed a maximum cap on interest rates at no more than 4 per cent of the CBK’s base lending rate. However, the Treasury opposed the law and convinced legislators that it would go against the concept of a free market. Treasury indicated that, in the long-term, high interest rates would be addressed by a proposed law that would overhaul governance at the CBK.

The proposed Central Bank of Kenya Bill set to be tabled in Parliament in February 2014 to synchronise the current banking regulatory regime never saw the light of day. In March 2014, the Central Bank of Kenya purported to address this issue through the Central Bank of Kenya Bill 2014.

Interestingly, the Central Bank invited public submissions in regards to its functions. But the bill amounted to nought. Once again, the Central Bank had failed in developing a regulatory framework.

The establishment of the Kenya Bankers’ Reference Rate (KBRR), on which banks would price their loans, was one of the recommendations of a committee formed by Treasury CS Henry Rotich in January 2014, to find ways of cutting interest rates, which have made borrowing for investment harder. This remedy has turned out futile, as banks have continued to charge interests at rates double the KBRR.

On the other hand, the Kenya Bankers’ Association (KBA) does not have statutory nor institutional authority and ability to effectively control member banks, and therefore cannot assume the role of a monetary regulatory authority, which will assist Kenya to recover from the current exploitative banking regime.

Recent history has shown that it is inept for Kenyans to entrust a KBA member banker with their financial wellbeing in the absence of an effective money market regulation. Indeed, KBA has been in favour of freely fixed interest rates, rather a public monetary policy.

Analogously, the Government has a regulatory framework for oil prices. Why is this? Because like interest rates, oil is a key driver to our economy. The oil prices kept appreciating despite falling international prices.

Before the capping was done our local pump price did not have any relationship with the international barrel prices. The oil companies, like the KBA, put up a spirited fight. They claimed that regulating the oil pump price would spell doom to the companies. Look at them now. The prices are regulated and the companies are still making profits.

Across the world, many countries have embraced a regulatory framework for interest rates. Argentina, Zambia, Canada, Germany, a host of countries within the European Union among others resulted to such measures in order to protect their citizenry from exploitation. I see no reason why Kenya shouldn’t go this route.

Despite the spirited fight by the Kenya Bankers Association, this bill has received a lot of support from across the political divide in the National Assembly. Parliament, tired of the ineptitude of the Central Bank on the suffering of borrowers, will resoundingly pronounce itself by passing this bill into law.

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