Opinion & Analysis

Lenders face more woes if proposed law goes through

Central Bank building in Nairobi. Proposed law to usurp Central Bank’s role  of setting bank charges. PHOTO | FILE
Central Bank building in Nairobi. Proposed law to usurp Central Bank’s role of setting bank charges. PHOTO | FILE 

I smell more trouble for banks if the proposed Banking (Amendment) Bill 2017 gets to see the light of day. The bill is two-pronged: first, it seeks to stop Ministries, Departments and Agencies (MDAs) from warehousing funds with commercial banks (other than those with state ownership).

I wrote about it and said it is a very unnecessary piece of legislation which will have little or no impact on banking sector funding. Second, it wants to make it explicit that the Banking (Amendment) Act, 2016, caps the annual percentage rate (APR) and not just the nominal rate.

In loan pricing, in addition to the interest rate component, there are various costs associated with the loan. They range from bank fees to third-party charges such as legal fees, insurance and government levies. All these costs, summed up, are referred to as the total cost of credit (TCC).

When expressed in percentage terms, it is known as the annual percentage rate (or simply-APR). Commercial banks in Kenya adopted the APR pricing mechanism in July 1, 2014 (initially on a trial basis).

Since then, consumers have been able to compare different bank loan costs based on standardised parameters and a common computation model. However, the Banking (Amendment) Act, 2016 only capped the interest rate component of the loan cost and not the non-interest costs.

This is what Kikuyu MP Kimani Ichung’wa, the vice chairperson of the Public Investment Committee (PIC), and the author of the new bill, wants to change.

This, if passed into law, is going to trigger additional income hair-cuts for banks. On average terms, banks took 90 basis points off loans in fees and commissions in 2015-which translated into Sh21 billion.

As at September 2016, they had taken home Sh16.6 billion off loans in fees and commissions. In 2015, Equity Bank led the pack after hiving two per cent off loans in fees. It was followed closely by KCB at 1.4 per cent. The least expensive banks were Citi, Standard Chartered and Stanbic—which hived off just 20 basis points on average terms.

If passed, the Ichung’wa bill will mean two things: one, loan products that have third-party costs cobbled together with other direct loan costs—such as mortgages—will have to be unbundled and borrowers of such products forced to finance steep third-party costs upfront.

Banks will have to shoulder most of the administrative costs associated with the loan application and this will mean hair cuts on fees and commissions from loans and advances.

Wiping Sh21 billion off banks’ revenue basket will mean some 300 to 400 basis points off returns on shareholder equity. Mix that with additional income hair cuts as a direct result of risk-pricing caps and you have yourself an impotent investment cocktail for banks.

Parliament, in my view, is fast approaching over-regulation zone and now care has to be exercised to achieve the right balance between consumer protection and creating an optimal level of cost of doing business.

To a certain degree, Ichungwa’s proposals will be usurping Central Bank’s powers of setting bank charges as conferred to it by the Banking Act. Broadly, the spirit of his proposals looks noble but there are more subtle ways to spread the spirit.

Because the bill is still in the drafting stage, I would suggest he considers capping these charges as a percentage of loan value. He could also consider establishing a bucket list of chargeable and non-chargeable items. Otherwise bracketing everything will now amount to over-regulation.

Mr Bodo is an investment analyst. Email: george.bodo@gmail.com