Commercial banks have moved to enforce the narrowest meaning of deposit accounts that qualify to earn the seven per cent (70 per cent of Central Bank Rate) set in the recently enacted banking law.
The lenders have in recent days rushed to reclassify deposit accounts to avoid paying the huge interests on client funds even as they moved to comply with the capping on the cost of loans.
Some banks had by close of business last Friday sent out notices to customers indicating that only fixed accounts are qualified to benefit from the deposit rate.
This is a marked departure from the recent industry practice that paid savings accounts an average deposit rate of 1.4 per cent according to Central Bank Rates published in April this year.
All deposit accounts have been earning interest at an average rate of 6.92 per cent before the enactment of the new law, but depositors of large amounts negotiated special rates depending on the period they would leave the money with the banks.
It has emerged that banks are reclassifying the accounts to designate savings and current accounts as non-interest bearing transactional accounts.
Some of the lenders also indicated that they would cut down on fixed deposits accounts and advised their clients that fixed accounts with more than two withdrawals would be treated as transactional current accounts that do not qualify to earn any interest.
“Zidisha accounts with more than two withdrawals in a calendar year will be automatically migrated to a non-interest bearing transactional current account,” Barclays Bank said in a notice to customers on Friday.
Commercial Bank of Africa group managing director Isaac Awuondo took a similar position, stating that the lender would apply the strict legal definition on saving accounts under the new legal regime.
Mr Awuondo said savings accounts would only earn interest if the holder does not make more than one withdrawal per month.
“If you withdraw more than once a month, you don’t earn interest. This applies now and will also apply under the new rates,” Mr Awuondo said.
Barclays Bank issued the two-week notice to effect the Banking Amendment law reviewing interest rates on the Zidisha Bonus account to 7.35 per cent per annum.
“The interest payable to you may be calculated and paid semi-annually on an average balance basis. You will qualify for an additional bonus of 0.25 per cent per annum if no more than two withdrawals are made within the 12-month period,” the notice said.
Middle East Bank CEO Dhiren Rana said the lender had sought clarification from the regulator on how to apply the deposit rate stipulated by the law before it could effect a change.
“There is so little clarity because this is a law without definitions. We are seeking clarifications. We are not doing any migration as we speak,” Mr Rana said.
Co-operative Bank, which became the first to announce a cut in lending rates to 14.5 per cent, did not immediately indicate whether the deposit rate would apply to customer savings.
It later announced that it had started paying the depositors at the stipulated rate, but fell short of offering details.
The latest developments are in line with analysts’ expectations that banks would find ways of shielding themselves from the burden of paying high deposit rates to remain profitable.
“We expected banks to introduce accounts with zero interest features to bypass the minimum interest payable. For example, Co-operative Bank affirmed compliance with the 14.5 per cent maximum rate on bank loans, but was initially silent on the minimum rate on deposits,” Investment firm Cytonn said in its weekly analysis.
Kenya Commercial Bank (KCB) also remained silent on the rate of deposits applicable as it announced compliance with the lending rate ceiling.
The bank’s corporate communications manager, Peter Mwaura, said the deposit rate would only apply to fixed term deposits although there seemed to be confusion among the bank’s staff.
One KCB customer care agent told the Business Daily on phone that the new rate would apply to KCB Cub account, Simba Savings and the Student account.
“For the fixed deposit that the rate will vary depending on the amount and time,” she said.
KCB, which is Kenya’s biggest bank by assets, has four transactional accounts, two savings accounts and one current account products.
Banking insiders said the lenders were taking advantage of the ambiguities in law because the Central Bank of Kenya has refused to offer clarity.
The law says the rate will be paid on an interest bearing account yet many current accounts are not, and many banks were expected move savings accounts to the current accounts corner to avoid paying.
The Kenya Bankers Association (KBA), the banks’ lobby, reckoned that as long as banks complied with the law, the structuring of the products should not matter.
“Overall, the direction KBA has given banks is that they must comply with the law. KBA does not, and would not, have a position on how banks should structure their deposit accounts to be in compliance with the law,” KBA’s director of communications Nuru Mugambi said.
Most banks have already opted to use the Central Bank Rate (CBR) which currently stands at 10.5 per cent to determine the cap on loan rates instead of the Kenya Banker’s Reference Rate (KBRR), which stands lower at 8.9 per cent.
“In absence of details, the banks have applied the CBR. We will have to adjust once there is that clarity,” KBA chairman Lamin Manjang told Bloomberg News.
Banks are also looking at the growing mobile loan assets as a hedge to offset the slashed revenues and have said loans offered on mobile phone fall outside the interest rates caps law.
“The law does not speak about the microfinance institutions at the moment and our mobile lending is currently a micro business product,” Kenya Commercial Bank CEO Joshua Oigara said.
Mobile lending by banks, including M-Shwari, M-Coop Cash, KCB-M-Pesa and Equitel have been dispensing billions at rates of between five per cent and 10 per cent a month; which when compounded annually ranges between 60 per cent to over 100 per cent.