Why Kenyans may still be exposed to high interest rates

Central Bank of Kenya (CBK) governor Patrick Njoroge. Even if the President were to sign the proposed Bill into law, microfinance institutions and mobile phone loan transactions will not be affected by the decision by the National Assembly to cap interest rates at no more than four per cent of the Central Bank rate. (PHOTO: COURTESY)

An amendment to the Banking Act that introduces the capping of interest rates will still leave any Kenyans exposed to exploitative rates by financial institutions, it has now emerged.

Even if the President were to sign the proposed Bill into law, microfinance institutions and mobile phone loan transactions will not be affected by the decision by the National Assembly to cap interest rates at no more than four per cent of the Central Bank rate. The Banking Act (Amendment) Bill does not cover microfinance institutions or any other entity which is not licensed under the Banking Act.

Microfinance banks are licensed and regulated under the Microfinance Act, 2016. A significant percentage of the Kenyan population accesses credit through microfinance institutions which,  like commercial banks, to charge exorbitant interest rates. Similarly, regulation of interests charged on loans from mobile phone operators is not covered under the Banking Act.

According to Central Bank records, microfinance sector gross loans grew from Sh47.1 billion in December 2015 to Sh49.1 billion in June 2016. Similarly, the mortgage finance gross loans grew from Sh54.6 billion to Sh55.7 billion during the same period. The gross loans in commercial banks grew from Sh2.1 trillion in December 2015 to Sh2.2 trillion in June 2016. Similarly, CBK records show total gross loans through mobile phone platforms hit Sh15.04 billion as at April 2016. Michael Mithika, a financial services consultant, described the move to cap interest as positive but one that requires a holistic approach. “As the amendment is, it does not apply to non-bank financial institutions. Basically the attempt here is to address the credit regime and it starts all the way from the banking sector to the non-banking sector which include micro-finance, saccos among others. The inadequacy of what is currently being proposed whether it is by way of resolution as proposed by the banks through MoU or through the proposed Bill is that the non-banking financial institutions are not regulated,” he said.

Mithika said the MoUs proposed by commercial banks cannot be a solution to the unfavourable credit regime in Kenya.

“What is currently proposed by the banks MoUs broadly talks about enterprise loans but I think the issue at hand is consumer credit and personal credit. Enterprise loans are important but the greatest harm happens to people who take personal loans and there lies what we call predatory behaviour, especially by the non-banking financial institutions and they are still free to do what they want to do. There is something positive happening but a more holistic approach to the issue of credit is needed,” he added. In a bid to dampen support for the law,  commercial banks have began to reduce interest rates days after they handed in a seven-point plan to reduce the cost of loans.

About seven banks have now cut their interest rates by an average of one per cent in the last two days, a reduction that may be seen as a drop in the ocean given the high interest spreads they have been enjoying for decades.

Yesterday, Family Bank, Bank of Baroda, Bank of Africa and National Bank joined Transnational Bank in cutting interest rates by between 97 to 100 basis points (0.97 per cent to 1 per cent). The cuts come in a week that also saw the lenders put together a Sh30 billion kitty to lend small and medium-sized enterprises at “friendly interest rates.”

Lenders also cancelled bank account closure charges which are seen as a nuisance fee as part of their new measures to support their lobbying.
The cuts are a departure from the past when banks had defied signals by the market regulator to lower the interest rates.

Banks had also largely refused to follow the Kenya Banks’ Reference Rate (KBRR), which had been proposed as one of the measures to lower the rates. This saw the KBRR fail to achieve the desired goal in what has seen it being described as a “toothless” policy by the sponsor of the law.

Toothless BULLdog

The sponsor of the new Bill, Kiambu Town MP Jude Njomo, said Kenyans should not allow banks to hoodwink them this time round with the goodies they are throwing at them. “Treasury promised the previous Parliament that the KBRR would be effective in dealing with interest rates and this is how it convinced law makers that it was putting in place measures to control banks without legislation.

"But KBRR has turned into a toothless bulldog,” Mr Njomo said yesterday in an interview with The Standard on Saturday.

Njomo said banks had not honoured previous commitments to lower interest rates, warning that they should not be trusted by a mere Memorandum of Understanding that is not anchored in law. In the latest instance, banks have taken more than 25 days to react to the reduction of the rate by the Central Bank of Kenya (CBK). “Effective 25th August 2016, Family Bank will lower its interest rate in line with the 0.97 per cent reduction of Kenya Bankers Reference Rate (KBRR) by the Central Bank of Kenya,” Family Bank said in a notice yesterday.

The Monetary Policy Committee (MPC), the rate-setting organ of the CBK, cut the KBRR on July 25 from 9.87 per cent to 8.90 per cent. But it retained the CBR at 10.5 per cent in order to anchor inflation expectations, and to maintain market stability. But as has been the practice in the past, the lenders had ignored this cut until legislators passed the law capping the rates.

“I have no problem with banks making profits. But they must not make profits at the expense of Kenyans. Banks continue to make profits while their customers are dying. This is immoral,” Njomo said.

He said he was confident that the President would sign the Bill into law and shield Kenyans from exploitation by banks. The Bill continues to win support of many groups, including the Institute of Certified Public Accountants of Kenya’s (ICPAK).

If the Bill is signed into law, bank lending rates would be capped at 14.5 per cent based on the current CBR of 10.5 per cent.

This would be a drop by over 400 basis points from the average lending rate of 18 per cent with some borrowers paying as high as 24 per cent for short to medium term loans.

The Bill also pegs the minimum interest rate payable on deposits held in interest earning accounts at 70 per cent of the CBR — meaning at current rates, depositors would earn an interest of 7.3 per cent on their cash.

“I am confident that the President will sign the Bill into law because lowering interest rates was part of the Jubilee manifesto,” Jomo said.