CBK warns banks against charging borrowers new fees

The Central Bank of Kenya yesterday warned commercial banks against introducing new or increasing existing transaction fees without its approval even as it refused to bring clarity to grey areas of the law capping interest rates, whose interpretation continues to roil the market.

Patrick Njoroge, the Central Bank of Kenya (CBK) governor, said no bank has the authority to introduce new products in the lending market without the regulator’s approval and warned those doing so of dire consequences.

“You cannot just introduce a new product without approval from CBK – we will follow on that. We are the regulator and I don’t think banks would want to attract the wrath of the regulator,” Dr Njoroge said at a Press briefing.

He did not, however, indicate whether the CBK had approved any new banking products since the coming into force of the interest rate capping law on Wednesday last week, even as he promised to investigate if such increments have occurred.

Dr Njoroge said there had not been a sudden increase in the number of approval requests for new banking products, signalling that commercial banks that have taken such action are in breach of the law.

Commercial banks have recently introduced new transaction fees and redefined interest earning deposit accounts in a bid to protect their revenues under the new legal regime, catching many consumers by surprise.

Equity Bank has, for instance, introduced an appraisal fee for its mobile phone-based loans dubbed Eazzy Loan and Eazzy Plus -- charging its customers a flat fee of between one and three per cent, depending on the period of repayment.

Other lenders have introduced new fees or increased existing ones such as insurance premiums charged on loans, taking away any relief that the new law offered borrowers.

Dr Njoroge refused to offer any clarity on mobile loans pricing, leaving the ongoing confusion to continue.

Commercial banks have offered own interpretations of the law, leaving in its wake confusion that has seen some like Commercial Bank of Africa charge a flat fee for its M-Shwari loans, a product it offers in partnership with Safaricom’s M-Pesa.

Dr Njoroge said the public had the option of moving to cheaper lenders in the event they are dissatisfied with one, meaning that the confusion will persist.

The CBA is charging 7.5 per cent facilitation fee for its mobile loans that are repayable in a month, meaning the annualized effective rate for the credit facility stands at a whopping 90 per cent.

It has, however, argued that such extrapolation is not possible because M-Shwari loans must be paid within a month.

The CBK also declined to pronounce itself on the banks’ reclassification of customer savings accounts to non-interest earning current accounts to avoid rewarding interest to savers.

Kimani Ichung’wa, Member of Parliament for Kikuyu, said the National Assembly will consider further amendments to the Banking Act to close the loopholes that are being used to escape the new law and to regulate deposits from government agencies held by banks.

“Let the banks know that if they get creative with hidden costs we will also be more innovative to protect the public against their insatiable greed for higher profits through stiffer legislation to cover all areas,” said Mr Kimani.
Interest Rates Advisory Centre (IRAC) said it was not the first time banks had got into trouble for varying their fees without following the law.

“Illegal and un-approved bank charges have been with us for years and we expected banks to resort to it in an effort to defeat interest rate caps,” said IRAC in a statement even as it criticised the CBK for giving banks the freedom to operate with impunity.

Separately, the Central Bank said it expected banks to cap their lending rates at 14 per cent from yesterday following a drop in the base rate announced on Tuesday.

Some of the banks said they had already lowered their rates to 14 per cent from the 14.5 per cent rate that took effect a week earlier.

The CBK said the interest caps had complicated the Monetary Policy Committee’s (MPC) decision making process, having turned the CBR from being the signal it was to a peg.

The MPC decided to cut the CBR in an effort to stimulate lending following a slowdown in credit growth. The cut could, however, result in banks deciding to lock out presumed risky borrowers from the credit market ultimately negating the purpose of the decision.

READ: CBK’s rate cut tips the scales in favour of cheaper loans

Credit to the private sector grew by seven per cent in July compared to a similar period last year or lower than the 15.3 per cent target the CBK had set to support economic growth.

The CBK said the slowdown could be attributed to error in the data submitted by banks or companies getting other sources of funds such as foreign funding.

Non-performing loans, however, continued to rise, hitting 9.3 per cent of the industry loan book up from 8.4 per cent in June and 5.7 per cent in December, underlining the tough economic environment.

High cost of credit had been cited as a major hindrance to new borrowing and a contributor to continued pile-up of bad loans, but the MPC meeting is seen to have come too soon to assess the impact of the recent drop in the cost of credit with interest rate caps.

It is hoped that the capping of interest rates would reignite borrowing and drive economic growth.

Questions have been raised on why CBK opted to use the CBR as the base rate given it is set in a boardroom meeting held every two months and not the Kenya Banks Reference Rate (KBRR), which is consistent for six months and inclusive of external factors such as government borrowing.

Dr Njoroge also declined to comment on the matter, stating it was an issue before the courts.

Activist Okiya Omtatah went to court challenging banks decision to apply the CBR as the base rate arguing they ought to use the KBRR. The case was filed in court at a time when CBK had kept mum over the base rate to be used.

It has since issued a directive that CBR will be the base rate as it is anchored in law unlike KBRR which was created by the banking sector to repulse previous attempts to cap interest rates.

READ: Omtatah wants banks to cut interest rates further