Yesterday (27th July, 2016), the National Assembly passed the Banking (Amendment) Bill, 2015 whose stated object is to regulate interest rates, by capping interest charged on loans by banks and financial institutions and fixing the minimum rate to be paid on deposits.
The highlights of this piece of legislation are below:
Firstly, rather incongruously, Section 31A is, introduced under Section 31 of the Banking Act, (Cap.488) (Section 31 allows publication on certain conditions of information provided to the Cabinet Secretary for Finance under the Act). This new Section 31A requires prior disclosure to a borrower of all charges and terms relating to the loan- codifying what has now become standard practice.
Secondly, potentially more controversial is Section 33B (perhaps even more incongruously as Section 33A relates to what may done following an audit or an inspection of the bank or financial institution under Section 24) which sets, on the pain of criminal sanction with fines of up to 1 million KES or six-month imprisonment, the ceiling interest rates on loans and floor on interest payable on deposits, both relative to CBK’s base rate:
- The maximum rate on interest on a ‘credit facility’ (a term not defined) should not exceed 4% of that base rate
- The minimum rate of interest on deposits should not go below 70%
Finally, a host of issues left unaddressed include - the effect on existing loan agreements, going forward relating to variation of rates; whether such interest rates must always be adjusted to move lockstep with changes in base rates; triggering default interest rates (penalties) etc. This Act although passed with good intentions will undoubtedly have a disruptive effect in the Banking Sector, in particular, it might deter foreign direct investment in the Kenyan Banking Sector. Thought must also be given to how these new provisions are to be harmonised with part VII of the Consumer Protection Act, 2012.