WORDS: Kwame Owino, CEO, Institute of Economic Affairs
The National assembly has passed The Banking (Amendment) Bill, 2015 and sent it to the president of Kenya as required by article 115 of the Constitution of Kenya. This legislative procedure leaves the president with three main options namely, to quickly assent to the bill and ensure that it becomes law, to refer the bill back to parliament by noting any reservations or to stay the issue for 14 days and have the bill pass into law without any comment or direct assent to it.
For the purposes of the Banking Amendment Bill of 2015, there is still time for the president to take any of the three courses of action prescribed by the constitution. However, the main issue that is relevant to the public is what effects passing this bill will have on them.
The first implication is that the passage of the bill would bring into force section 31A of the Banking Act. Its purpose is to ensure that a bank or financial institution that offers a loan to a borrower is compelled to disclose all charges and terms related to that loan. Parliament intends for the banks and financial institutions to make Kenyans understand all the charges and rates that apply before the borrower makes a decision. In this sense, the law would ensure greater disclosures and knowledge on the part of borrowers about the full terms of the loan and especially any penalties and charges that are not always clear in loan agreements.
From the perspective of the borrower, this law seems to require a bank or financial institution that is offering loans to explain beforehand what the interest rates, charges and the duration of the payments will be. The assumption here is that with this knowledge, every borrower would have a more accurate view of what their obligations are in terms of servicing the loan that they are seeking. It is also possible that the borrower can then take these terms and compare them across competing banks in order to understand which provides the best rates and terms.
Secondly, the bill seeks to insert an amendment 33B (1) (a) whose aim is to restrict banking and financial institutions from setting their own interest rates for loans. Specifically, the law prescribes that no banking institution that issues a loan would charge an interest rate that is not more than 4 percentage points above a base rate set by the Central Bank of Kenya. For the bank client who is seeking a loan, it would now be possible to predict the maximum interest on a loan to be provided using the base rate as be would declared by the Central Bank.
This measure provides for predictability and means that banks will have reduced flexibility in setting interests rates for different borrowers. For example, if you borrow 50 thousand shillings and the base rate is set 10%, then the total interest to be paid within a year would not exceed 7000 shillings per year. This is because the maximum interest rate can only be 14%, which includes the base rate at 10% and the maximum of 4 percentage points above that.
In addition, section 33B (1) (b) of the Banking Amendment Bill implies that any Kenyan with a savings account in a bank will receive a predetermined interest rate on the deposit. Here too, the reference rate is the base rate set by the Central Bank of Kenya. This clause sets the minimum interest rate that a bank would pay for a savings deposit at 70% of the base rate set by the Central Bank of Kenya. For illustration, if the bill became law and the base rate was set at 10%, then the minimum amount payable for savings account would be 7% interest on savings. Here too, the intention of the members of the National Assembly is to force the hand of banking institutions that receive deposits to pay to savers interest on savings.
Fourthly, the legislation also adds criminal punishments to any violations of prescriptions of the Banking Amendments Act of 2015. Under this law, it would be illegal for any banking institution to enter into an agreement with a client to charge interest rates on loans and to provide interest on savings without reference and adherence to the law. While both the individual borrower and the banking institution are prohibited from disobedience to these clauses, the legislators chose to attach criminal sanctions on the banks alone. Violation by a bank or its employees could attract a fine of not less than 1 million shillings or imprisonment of at least one year or a combination of both fines and imprisonment.
In conclusion, Kenya’s National Assembly is introducing consumer protection measures for borrowers and savers through this proposed law. And the instruments that they have chosen are intended to reduce the discretion of the banking and financial institutions in interest charged for loans and also for the interest payments for savings. Whether these prescriptions are desirable and effective are the subject of debates but the legislators have introduced consumer protection measures in the credit and savings markets.