Economy

Revised bill on loan cost caps reaches House

JOMO

Jude Njomo, the Jubilee lawmaker who sponsored the cap law in 2016. FILE PHOTO | NMG

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Summary

  • Now, Jude Njomo, the Jubilee lawmaker who sponsored the cap law in 2016, has introduced a fresh bill that seeks to entrench the limits on interest rates.
  • Failure to amend the ambiguous section of the Act will mean going back to a free-floating interest rates regime, where commercial banks set the cost of loans.
  • The new bill provides for fines and jail terms for borrowers who ignore interest rate caps.

Parliament has received a new bill capping commercial bank interest rates that seals loopholes that led the High Court in March to declare legal limits on lending charges unconstitutional.

Judges had given Parliament till March next year to re-examine the law, which the Treasury is seeking to repeal through the Finance Bill, arguing it was keeping banks from lending to customers they considered too risky.

Now, Jude Njomo, the Jubilee lawmaker who sponsored the cap law in 2016, has introduced a fresh bill that seeks to entrench the limits on interest rates.

Failure to amend the ambiguous section of the Act will mean going back to a free-floating interest rates regime, where commercial banks set the cost of loans.

High Court termed the rate cap law illegal because it failed to define key technical words, making the legislation ambiguous.

The judges took issue with Parliament’s failure to define the terms ‘credit facility’ and the ‘Central Bank Rate’ (CBR), leaving them open to misinterpretations.

The interest rates cap restricted banks to charging customers a maximum of four percentage points above the CBR.

Section 33 B(1) of the Banking Act states that “a bank or a financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than four percent, the Central Bank Rate set and published by the Central Bank of Kenya”

The judges noted that the words “at no more than four percent, the Central Bank Rate” are vague since it is not clear if it is above or below CBR.

The judges further said that CBR has neither been defined nor clarified in the Banking Act and yet the clause failed to refer to the section of the Central Bank of Kenya Act that clearly defines CBR, therefore making it open to multiple interpretations.

They also observed that Section 33B (3) only prescribes punishment for banks and their CEOs and not customers and other persons who contravene the provision.

The new bill provides for fines and jail terms for borrowers who ignore interest rate caps.

The bill has fixed the wording in line with the High Court’s ruling with ‘credit facility’ now reading ‘loan’ and defining the ‘rate’ as the one captured under section 64 of the Central Bank Act. Loan is also defined as any advance, credit facility, or financial guarantee.