Experts root for adoption of credit disclosure regime

Kenyans will soon compare loan costs across institutions and receive detailed credit information before they sign on the dotted line following moves towards a more transparent lending regime.

A uniform disclosure manual has the potential to reduce interest rates that customers pay on loans by fostering price competition among lenders as has been proven in countries such as Peru in South America.

The country’s more than 40 banks compete more on the product range than on the charges levied on loans and fees on services.

Disclosure regime
A standard disclosure regime for commercial banks is planned for mid next year before an advanced one is put in place by 2012.

The standard pricing approach is the product of a research done by South African-based advisory firm Genesis Analytics and commissioned by the Central Bank of Kenya and Financial Sector Deepening (FSD) Kenya.

It was recommended in a bid to promote greater transparency and consumer protection within the local financial sector and to allow consumers to compare rates and shop around to their advantage.

The proposal has received positive reception from the financial sector following consultations between financial industry players including regulators, banks and the co-operative movement under, which savings and credit societies fall.

Although the Kenya Bankers Association declined to comment on the development, it is understood that a change in the banking and consumer law is awaited before lending institutions are required to comply.

The Genesis Analytics report has recommended that the content of the Consumer Protection Bill, which has been pending in Parliament, be enhanced to provide for detailed disclosure on loan contracts.

Presently, it is difficult for the average consumer to understand the overall cost of credit or benefit attached to savings products because the interest rate is presented in different terms — simple, compound, variable or fixed — with other charges and fees often hidden.

Genesis Analytics based its recommendation for a uniform disclosure regime on experiences in the US, UK, Ghana, Ireland, Malaysia, Canada, Peru and South Africa.

“In some of these (countries) a significant reduction in interest rates has been linked to the introduction of disclosure. In Peru a 15 per cent fall in interest rates has been attributed to its new disclosure regime,” it said.

Financial institutions in Peru provide complete information regarding interest rates, commissions and other fees through leaflets, posters inside banks, staff and sponsored websites.

The annual percentage rate (APR) — which enables the customer to compare the cost of money among various institutions — was also found to be the most common disclosure regime in the developed world and was supported by extensive regulation on definition of interest rate, its calculation, accuracy, scope and dissemination.

In all cases the regulator, in this case the Central Bank, would guide and enforce compliance and disclosure, especially on the standardisation and calculation of charges for the APR to be effective.