A lot of interest has been shown around calls for the review of the year-old law capping loan interest rates.
Whereas price controls may not be good for the economy in the long run according to industry regulator, stakeholders want the Central Bank of Kenya (CBK) to implement global benchmarks that will ensure borrowers are protected against exploitation by banks should the ceiling be removed.
Mr Wilfred Onono, managing consultant at the Interest Rate Advisory Centre (IRAC), an organisation which advocates for fairness within the banks’ lending functions, says free pricing of loans will ensure that people who have demonstrated ability to repay will negotiate better interest rates. Banks can analyse such performance and reward good borrowers.
“As it is today with the law capping interest rates, any borrower who qualifies for a loan gets uniform interest rate irrespective of whether such a person is a good payer. So indeed, there is a good justification for free pricing of loans,” Mr Onono says.
He, however, says given past experience, something needs to be done about the attitude of the banks.
Concerns that banks were ripping off ordinary Kenyans who had taken up different loan products has led to various laws being developed since the 1990s, to try and regulate interests. Many of these did not achieve their purpose.
Consumer Federation of Kenya (Cofek) Secretary General Stephen Mutoro is nevertheless of the opinion that discipline and self-regulation among lenders is a process and not an event, and that there is no guarantee banks will continue to comply in the long run.
“Experience has shown that the banking sector is the one which is the most indisciplined in following processes. The question we need to ask is what necessitated the law in the first place,” said Mr Mutoro.
He believes there is a skewed attempt to blame all the problems in the industry on the year-old law.
“Everyone seems to be blaming the banks’ dismal performance on the rate caps law but no indication has been given of a bank that is almost collapsing because of this law,” Mr Mutoro adds.
“As far as we are concerned, while we don’t support price control for the long term, we are yet to be satisfied that the ground has shifted to warrant removal of the rate caps without clear alternative remedy or measures,” he says.
The latest is the Banking (Amendment) Act, 2016, which came into force on September 14, last year, and which caps loan charges at four percentage points above the Central Bank Rate (CBR), presently standing at 10 per cent.
It also requires lenders to pay interest of at least 70 per cent of the CBR on term deposits.
Statistics indicate that the law has had the effect of shaving Sh26.3 billion off commercial banks’ lending income in the first six months of this year, setting them up for lower profitability for the full year.
The 38 lenders earned Sh140 billion from interest charged on loans to customers, a 15.8 per cent drop from the Sh166.3 billion they got in a similar period last year.
“Once left on their own and without regulations, banks operate like cartels, competing on who is making the highest profit. Why should banks make huge profits year after year in an economy that is not performing,” Mr Onono wonders.
He says internal best practice, being implemented in most countries, should be embraced to ensure that banks in Kenya are brought into the reality that they have a bigger role to play in the development of the economy, by providing affordable credit.
“We need to ensure that we move together as a country and banks have a greater role in this aspect. Banks need to give us that assurance that they will operate responsibly by giving affordable loans, which in turn enable borrowers to have easy access,” says Mr Onono.
Critics of the year-old law have argued that though its intention was good, it was thought out with a lot of emotions, and thus challenges in its implementation.
In the period prior to its enactment, there appeared to be a general support of the intentions behind its formation but parties differed on how this was to be done.
CBK Governor Patrick Njoroge recently disclosed that a preliminary finding of a joint study with the Treasury on the impact of the rates capping on growth of credit had confirmed a negative impact.
He indicated an intention to push for a repeal of the law. But even as the regulator moves on with this plan, it has warned that commercial banks will have to be more disciplined in the pricing of loans so as not to overcharge borrowers.
“What needs to change is the discipline among lending institutions. They cannot go ahead setting interest rates the way they were doing before. And it is our job to deal with them in the context of that market discipline,” said Mr Njoroge.
And even though he said it is in the interest of the country and CBK to work to reverse the law and go back to a regime where interest rates are freely determined but in a disciplined environment, Mr Mutoro argues that the public has instead been treated to promises and pledges, “but which to us is a mirage. We will fight these attempts to the bitter end.”
The Kenya Bankers Association (KBA) Chief Executive Habil Olaka, says discipline among lenders will be achieved from the initiatives they have already put in place and borrowers will have a wide discretion to choose a bank which gives them the best deal.
“We have been working closely with CBK to ensure the challenges which existed before are addressed, especially on transparency in how banks set rates,” Mr Olaka says.
Previously, customers had no way of telling how they were being charged. However, in a bid to transfer this power to the consumer, KBA has developed a website (www.costofcredit.co.ke) that will enable consumers compare process across banks at the same time, and be able to make a decision based on the bank which offers the best deal.
“In other words, you are forcing banks to compete on price. Previously, you didn’t know what they were offering and you were at their mercy,” Mr Olaka explains.
The bankers are currently working on developing an App, which can be downloaded and installed for those who have smartphones.
Mr Olaka said a regime where interest rates are freely determined will enable borrowers negotiate rates based on their track record, especially that contained in the credit reference bureaus (CRB) report.
Credit Reference Bureaus have been strengthened so that they play the vital role of promoting credit market as opposed to being seen as an avenue to blacklist defaulters. They will be used to assist in showing an individual’s track record and make it easier to get affordable bank products.
“That way, people will be fighting for their names to be on the CRB report. Those with good reports will not only get attractive interest rates, they may also be required to provide less collateral,” says Mr Olaka.
The bankers body is also putting in place the KBA Charter, and in it will be mechanism on how to ensure accountability, how customers are treated, and how banks should behave with one another as players in the credit market.
“This mechanism is giving some responsibility on KBA to help self-regulate the market,” Mr Olaka said, adding that a dispute resolution mechanism will also be adopted so that aggrieved customers can have their concerns addressed without necessarily having to go to court.
He believes that with these structures in place, there should be no fear that previous uncertainties will still exist.