Kenya:CBK orders banks to obey vague rate caps law in 2 weeks

Commercial banks have two weeks to comply with new interest rate caps even as the wording of the law transmitted by the Central Bank of Kenya (CBK) to chief executives remained vague and confusing.

The CBK, whose guidance the Kenya Bankers Association (KBA) had said was awaited on the matter of capping interest rates, Thursday said the lenders have until September 14 to implement the law.

The regulator did not issue any guidelines leaving the banks to interpret the intention of the law.

“This is to notify you that the Banking (Amendment) Act, 2016 has been duly published vide special issue of Kenya Gazette dated August 31, 2016. The date of commencement is September 14, 2016,” said CBK Governor Patrick Njoroge.

The wording of the Act raises queries on the quality of work put into the law, despite its enormous economic impact, as well as attention to detail by opposing parties.

“A bank or financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent, the base rate set and published by the CBK,” reads the Act.

Absence of the word “above” in the clause leaves some to interpret that the new rate is supposed to be 10.92 per cent assuming the base rate to be the Central Bank Rate (CBR) which is currently set at 10.5 per cent.

On deposit rates the Act reads: “The minimum interest rate granted on a deposit held in interest earning in Kenya to at least seventy per cent, the base rate.”

This though has been taken to mean 70 per cent of the base rate with banks stating the new deposit rate will be 7.35 per cent.

Bankers have also questioned whether the base rate it is refererencing is the CBR or the Kenya Banks’ Reference Rate (KBRR) or a new rate to be introduced by the regulator.

The CBK was also silent on whether the law will affect existing loans but a decision by some lenders to pass the benefit of the new law to current borrowers seems to have set precedence in the industry.

Confusion remains on whether microfinance banks are also to be regulated by the law given that the amendment was made to the Banking Act and not the Microfinance Act.

Exclusion of microfinance banks from the regulation is likely to entice banks to open subsidiary microlenders so as to continue offering loans in an unregulated regime.

Banks that have been silent on implementation of the new law will now have to give directions to their customers on the way forward in the next two weeks.

Credit: Business Daily