This archive report was first published on 5 November 2019.
Kenya: Banks Exploit Loopholes in Rate Cap Law ¶
Published on November 5, 2019
Commercial banks in Kenya are exploiting loopholes in the rate cap law to charge high interest rates, despite the law capping lending rates at four percentage points above the Central Bank Rate.
The Banking (Amendment) Act, 2016, which came into effect on September 14, 2016, aimed to protect consumers from exorbitant interest rates by capping lending rates at four percentage points above the Central Bank Rate (CBR). However, some banks have found ways to charge higher interest rates by exploiting gaps in the law.
According to Mr. Wilfred Onono, the managing consultant at the Interest Rate Advisory Centre (IRAC), most banks charge interest rates outside the law because certain situations were not anticipated when the law was drafted.
"When you read the law, the direct understanding is that interest on any loan is the CBK rate plus four per cent, but when we do recalculation, we realise that most banks are charging higher interest rates by purporting to split accounts as capital and arrears accounts," Mr. Onono said.
Some banks have introduced charges christened "non-compliance charges," which is a percentage charged on the outstanding debt at a particular time. Where loans are not serviced within the set time, banks demand interest above the set rates. Others charge higher interest on overdrafts.
For instance, one bank charges an additional 10 per cent above the interest cap on the loan portion in arrears. It has notified one of its clients that he is required to pay 23 per cent instead of 13 per cent for the amounts in arrears (default).
CBK Governor Patrick Njoroge supports calls to repeal the law, saying it is unproductive as it has seen commercial banks collude to deny Kenyans and micro, small and medium-sized enterprises (MSMEs) access to credit.
However, some argue that the law is necessary to protect consumers from exploitation. The rate cap law was introduced to cushion Kenyans against exploitation and high loan costs.
On Tuesday, MPs will vote on whether the law should be repealed or not. The decision by the National Assembly's Finance and National Planning Committee is in line with the President's recommendations in an October 16 memorandum sent to the House, detailing the reasons for his refusal to sign into law the Finance Bill, 2019.
