Kenya Reintroduces Interest Rate Caps Abandoned in 1991
(Bloomberg) -- Kenya’s government published an amendment to its banking law regulating how much lenders can charge for loans, yet failed to give more details on how the legislation that comes into effect on Sept. 14 will be implemented.
President Uhuru Kenyatta approved the law last month, reintroducing interest-rate limits that were done away with in July 1991. The amended Banking Act requires lenders to peg credit costs at 400 basis points above a benchmark central bank rate and also compels financial institutions to pay interest of a minimum of 70 percent of the same rate on deposits.
“We are still in this period of ambiguity and a lack of clarity,” said Aly-Khan Satchu, chief executive officer of Rich Management, a Nairobi-based adviser to companies and wealthy individuals. “It’s not a positive situation really. There are a number of key issues that are outstanding: the base rate, who’ll set it, what it is, among a number of other issues.”
Barclays Bank of Kenya, Co-Operative Bank of Kenya, CFC Stanbic Ltd. and KCB Group Ltd. are among lenders that have said they’ll reduce borrowing costs to 14.5 percent, pegging their rate on the Central Bank Rate that was maintained at 10.5 percent at the last monetary policy meeting in July. They extended loans at a weighted average rate of 18 percent in June, according to the most recent statistics from the central bank, compared with 15.7 percent a year earlier.
The new law says the base rate will be “set and published” by the central bank, without elaborating. Lenders must also disclose all charges and terms related to loans before granting credit.
Non-compliant financial institutions could be fined at least 1 million shillings ($9,878) and chief executive officers could be liable to prison terms of no less than one year if found guilty of contravening the law.
Six of 11 listed banks closed lower on Friday, with I&M Holdings Ltd. down 8.9 percent to 82 shillings while the nation’s biggest lender by market value, Equity Group Holdings Ltd., dropped 3.7 percent to 26.50 shillings.
Telecommunications provider Safaricom Ltd. is in talks with partner banks and the regulator on lowering interest paid on micro-loans disbursed through mobile phones, CEO Bob Collymore said in an interview.
“We are not sure the degree to which those limits apply to the two products,” he said, referring to credit extended by KCB and Commercial Bank of Africa or CBA, through its platform. “Having said that, there’s always a desire to reduce interest rates.”
CBA’s mobile-phone loan product, known as Mshwari, disbursed 40 billion shillings in credit by end-2015 while KCB, Kenya’s biggest lender by assets, extended 7 billion shillings through phones, according to Safaricom.
Kenyatta may be taking a risk a year before he seeks a second term in presidential elections, especially if the law stalls the $61 billion economy, which until now has been expanding at a faster pace than the sub-Saharan African average.
“My impression remains that this was a very populist decision,” Satchu said. “I suspect the government wants to send a very strong message and there is still more negotiation to come around how to implement this properly.”