Central Bank of Kenya governor Patrick Njoroge is Tuesday morning expected to chair the first monetary policy committee (MPC) meeting since the introduction of interest rate caps.
The meeting comes as confusion persisted in the market over interpretation of key aspects of the new law.
On Monday, many consumers of financial services reported that their banks had introduced a barrage of new levies that effectively deny borrowers any meaningful reduction in the cost of loans.
The confusion mainly arises from the fact that the CBK has refused to clarify many aspects of the new law – leaving it to every bank to apply their own interpretations.
Nearly a week since the new law came into force, for instance, it is not clear what qualifies as interest earning deposit accounts – a position that has left banks to apply their own interpretation of it.
Commercial banks have also been left to decide whether mobile phone-based loans qualify to be regulated according to the new laws or even whether what is charged for the mobile phone loans qualify as interest rates or transaction charges.
Commercial Bank of Africa (CBA) has, for instance, insisted that it will not be lowering the cost of M-Shwari loans arguing it charges a fee and not interest rate for the short-term credit.
CBA charges 7.5 per cent upfront fee for its mobile loans, which are repayable in a month. Consumer Federation of Kenya (Cofek) has promised to challenge CBA’s position in court.
The CBK’s failure to take charge of the industry’s application of the new interest rate regime is now being seen as posing great danger to the effectiveness of the monetary policy transmission mechanism, especially because most banks are quietly introducing new transaction fees to cover for loss of interest income under the new law.
It has, for instance, emerged that Equity Bank is charging ‘an appraisal fee’ of between one and three per cent on its mobile loans, reversing the rosy promise it made to borrowers last week with the announcement that it would charge the legal maximum interest rate of 14.5 per cent on a reducing balance for the short- term loans.
The bank says in official communication posted on its website that “loan appraisal fee on fresh application for loans repayable between two to three months stands at two per cent of the loan amount recoverable upfront.
For loans repayable between four and six months – three per cent of the Loan amount,” the bank says, adding that for loans repayable within a month the bank will charge a fee of one per cent.
Equity has further loaded a 10 per cent excise duty on the charge, adding a heavy cost burden on borrowers.
Equity Bank’s mobile loans are fully automated, raising queries on the appropriateness of charging the appraisal fee.
It also emerged that some of the lenders were in the process of raising the insurance charge associated with new loans while others had shortened the tenors of personal loans to between one and three years in order to maintain the monthly payments where they were before the new law came into force.
Introduction of new levies is expected to dampen the appetite for borrowing, which was expected to be the key gain under the new regime.
This is because the high interest rates that prevailed under the former legal regime (which usually translates to a harsh operating environment) were seen as prohibiting lending to productive sectors of the economy.
“The private sector credit gap (actual credit advanced to private sector minus the targeted credit allocation) widened rapidly from December 2015, implying that actual credit disbursed was much lower than the set target to support projected economic growth,” said CBK in its recent financial sector stability report as it raised the red flag over the slowdown.
Banks have also been shifting customer deposits to saving accounts, which do not attract interest return so as to minimise their interest expenses as CBK maintains silence.
Microfinance banks have said they do not fall under the ambit of the new law (again without a word from the CBK) locking out over 300,000 borrowers with the micro-lenders from enjoying lower rates.
Analysts had warned that banks were likely to circumvent the law to protect their revenues despite promises to embrace the spirit of the law.
CBK’s silence over these critical matters has laid ground for each lender to interpret the law as it deems fit based on their strategic positioning.
Some of the lenders are yet to pass the lower interest rates to existing lenders.
Standard Chartered said it was in the process of computing the new monthly installments, which will be communicated to borrowers beginning October. It said that any drop associated with this month will be refunded to the borrower.
Barclays Bank has opted to shorten loan repayment period for its clients with those desiring to enjoy the benefit through lower monthly installments required to put a written request to the bank.