Controlling bank interest rates will stop exploitation

I wish to respond to concerns raised by Mohammed Wehliye’s article in the Business Daily on March 19, 2016, that poured cold water on my proposed Banking (Amendment) Bill, 2015.

My proposed law to regulate interest rates is of unique standing. It speaks to the general welfare of the citizenry.

It principally intends to provide a mechanism for regulation of banks and financial institutions’ interest rates through the introduction of ceilings.

It proposes to put a cap on the rate of interest charged on loans and to fix the minimum rate of interest that these institutions must pay on deposits.

The Bill seeks to amend the Banking Act by introducing a new Section 31(a) that requires banks or financial institutions to disclose all charges and terms relating to a loan to a borrower. This is the most fundamental aspect of the proposed law.

For far too long, many bank customers have experienced obnoxious charges on their loans that they were initially not aware of, leading to their inability to service their loans hence the consequent raise in non-performing loans, which stood at a whopping Sh107.1 billion in 2014.

The proposal further seeks to introduce amendments to Section 33(b) of the Banking Act, which will set the maximum interest rate chargeable by a credit facility at below four per cent of the base rate set by the Central Bank of Kenya, and guarantees a minimum interest rate of at least 70 per cent of the base rate set by CBK.

These proposed provisions, if passed by Parliament, shall go a long way in safeguarding interests on loans intake, while protecting clients’ deposits.

Any bank or credit facility that intends to charge more than the proposed four per cent beyond the Central Bank Rate, shall be operating against the welfare of its clientele.

Consequently, an institution intending to pay depositors less than 70 per cent above the Central Bank Rate is out to bleed its industrious clientele dry.

It is for this reason that the Bill proposes a strict penalty of a fine not less than Sh1 million or imprisonment for a term not less than one year for such exploitative institutions.

Kenya can never be further from reaching its Vision 2030 goal than when wallowing in a banking regime that promotes super profits for the banking industry, and modest profits or even losses for their entrepreneur clientele.

It is appalling that in the last few years, seven out of the 10 highest earning companies in Kenya, are banks. The argument that regulating interest rates will push scale-entrepreneurs to oblivion holds no water.

In fact, this cadre of businessmen long shunned banks and have been confined to borrowing from chamas due to the former’s skyrocketing interest rates.

The reference to this Bill as a knee-jerk reaction is preposterous. The imminent failure by the Central Bank and the Treasury to cushion Kenyans from economic oppression by banks informs the need for a legislative recourse. Only Parliament, exercising its role of representation has attempted to stop this exploitation.

In the year 2000, the then Gem MP Joe Donde introduced the Central Bank of Kenya (Amendment) Bill 2000, at a time interest rates in Kenya were among the highest in the world-at 24 per cent.

The result was that 36 per cent of loans issued by banks were non-performing.

The Bill, popularly referred to as the Donde Bill, was passed by Parliament in December 2000, but it was rejected by then President Daniel arap Moi who referred it back to Parliament for further amendment.

Though it was later amended and assented to by the President to become law in August 2001, there emerged a technical oversight because its commencement date had been indicated to be January 2001 (eight months earlier), a situation that led to litigations by banks.

Resultant court cases made it impossible to implement the Act in its present form since the courts had ruled in favour of the banks.

A decade later in 2012, another Gem MP, Jakoyo Midiwo, proposed a maximum cap on interest rates at no more than four per cent of the CBK’s base lending rate (same proposal as Mr Ndonde’s). Mr Midiwo was responding to a jump in interest rates in the country following macroeconomic turbulence.
But the Treasury opposed the law and convinced legislators that it would go against the concept of a free market and that Kenya was trying to position itself as a regional financial hub and restrictive regulations on the banking sector could slow down this journey.

Overhaul governance

Treasury indicated that, in the long-term, high interest rates would be addressed by a proposed law that would overhaul governance at the CBK.

The proposed Central Bank of Kenya Bill was set to be tabled in Parliament in February 2014 to synchronise the current banking regulatory regime with international standards. It never saw the light of day.

In March 2014, the CBK purported to address this issue through the Central Bank of Kenya Bill 2014. But the bill amounted to nought.

The establishment of the Kenya Bankers’ Reference Rate (KBRR), on which banks would price their loans, was one of the recommendations of a committee formed by Treasury Secretary Henry Rotich in January 2014 to find ways of cutting interest rates.

This remedy has proved futile, as banks have continued to charge interests at rates double the KBRR recommendation although the rate only allows them to add a premium to the KBRR to take care of individual borrowers risk profile.

On the other hand, the Kenya Bankers’ Association (KBA), neither has a statutory nor institutional authority and ability to effectively control member banks and therefore cannot suddenly assume the role of a monetary regulatory authority.

Recent history has shown that it is inept for Kenyans to entrust a KBA member banker with their financial wellbeing in the absence of an effective money market regulation. Indeed, KBA has been in favour of freely fixed interest rates, rather a public monetary policy.

Analogously, the government has a regulatory framework for oil prices. Like interest rates, oil is a key driver to our economy.

Despite the spirited fight by the Kenya Bankers Association, this Bill has received a lot of support from across the political divide in the National Assembly.

Parliament tired of the ineptitude of the Central Bank on the suffering of borrowers, will resoundingly pronounce itself by passing this bill into law.

Mr Njomo is the MP Kiambu Constituency and sponsor of the Banking (Amendment) Bill, 2015.