Capital Markets

CBK spells out loan rules ahead of interest rate cap review

NJOMO

Kiambu Town MP Jude Njomo, the architect of the rate capping law. FILE PHORTO | NMG

Commercial banks will be required to publish information of all tariffs and charges on services, personal loans and mortgages on a common web platform, making it easier for customers to choose lenders.

The lenders will also be required to channel at least 20 per cent of their lending to medium and small-sized enterprises (MSMEs) under the proposed Central Bank of Kenya (CBK) guidelines ahead of the planned amendments to the rate cap law.

The government has promised the International Monetary Fund (IMF) a repeal of the rate caps, leaving consumers under a cloud of uncertainty over the future cost of loans.

“(In order to) promote enterprise development, each institution to undertake to increase its business loans towards MSMEs financing by at least 20 per cent by 2020 from December 2017 baseline,” says the CBK in new draft regulations.

The architect of the rate capping law Kiambu Town MP Jude Njomo said the draft measures would not rein in banks keen on profiteering.

“The commitment to lend at least 20 per cent to SMEs and the other measures should first be effectively implemented and it is seen to work before the caps are removed,” said Mr Njomo.

READ: IMF calls on Kenya to scrap interest rate capping law

Banks will also be allowed to put a risk premium on customer loans for a self-assessed probability of default backed by Credit Reference Bureaus data.

“In order to improve the credit pricing of loans extended to borrowers as well as implement differential credit pricing, based on a customer credit rating, institutions are henceforth mandated to implement risk-based credit scoring techniques in their loan screening processes,” says CBK while inviting comments from the public on the proposals by August 24.

“The credit scoring rating should be sourced from any of the licensed credit reference bureaus.”

The CBK and Kenya Bankers Association in May last year set up a website (www.costofcredit.co.ke) where all banks were required to publish the annual percentage rate, loan repayment schedule and any additional cost of credit on their loans.

Banks though have been on the spot for taking advantage of a legal loophole allowing them to load extra charges on loans.

In the new guidelines, the CBK warns that failure to adhere to the proposed measures will result in administrative sanctions under Section 49 of the Banking Act.