Treasury secretary Henry Rotich has proposed the setting up of a new super agency that will prevent banks from exploiting consumers through unscrupulous practices, including the loading of excessive interest and charges on loans.
Mr Rotich, in a Draft Financial Markets Conduct Bill 2018 published last week, wants a Financial Markets Conduct Authority (FMCA) set up to, among other things, set the maximum rate of interest a lender can charge. Members of the agency’s board will include the Treasury Cabinet Secretary and the governor of the Central Bank of Kenya.
The Bill is proposing stiff penalties, including a fine of Sh5 million for first time offenders and Sh10 million for repeat offenders who charge a borrower a rate above what is prescribed by the FMCA — effectively meaning that a bank that overcharges a large number of customers could pay up to billions of shillings in penalties.
“A lender shall not charge or recover, or attempt to charge or recover from the borrower or a guarantor any amount on account of interest under the contract that exceeds the maximum rates as may be prescribed by the Authority from time to time,” the draft Bill says.
The Bill also bars the lenders from varying the interest charge agreed on in a credit contract during the life of a loan, unless it is due to changes in a reference rate such as the one set by the FMCA.
Banks are also required to issue borrowers a pre-contract statement indicating the interest rate, insurance charges, fees and commissions to be charged on a loan.
If passed into law, banks will be required to indicate the number and date of instalments for the loan, and the total amount the borrower will have paid in principal, charges and interest at the end of the loan period.
Failure to make the disclosures, will attract a fine of Sh10 million for first time offenders and Sh20 million for a repeat offender. Publication of the draft Bill, which has a heavy bend towards consumer protection, also sets the stage for the promised review of the rate cap law.
While the Bill does not offer a repeal of the rate cap as contained in the Banking Act, it is in line with the promise Mr Rotich made last month on regulatory reforms for consumer protection ahead of planned removal of interest controls.
“It is not only an issue of cost of credit, but also that of consumer protection. We are putting forward a package of reforms to address the real cause of high cost of credit in Kenya and which leads to the elimination of the capping of rates,” Mr Rotich said on April 25.
Repealing the rate cap is likely to prove a delicate act given the political interest in the matter. The law was passed in 2016 with popular public support, and the omission of a direct repeal under the new Bill is an indicator that the Treasury could still be negotiating with lawmakers how to remove the cap.
Treasury director-general of budget, fiscal and economic affairs Geoffrey Mwau told Reuters last Thursday that plans were underway to enact a law that offers more flexible option on the rate cap.
While the CBK and the Treasury have been firm in their calls for the repeal of the rate capping law, they still have to convince a sceptical Parliament that such a move will not herald the return to the days when banks charged high rates.
The latest Bill is, however, silent on how the FMCA will be setting the maximum rate and the role of banking sector regulator CBK in the process —even though the CBK governor will sit on its board.
Before the rate cap — which is pegged on the Central Bank Rate (CBR) — came into effect, the CBK had in place the Kenya Banks Reference Rate (KBRR), which was used as the benchmark on which banks could load a premium when charging interest on customer loans.
The Bill also creates the office of a Financial Sector Ombudsman, expected to resolve “complaints by retail financial customers, financial product and service providers in relation to the provision of financial products and financial services to the retail financial customers”.