Law loophole denies bank customers billions in relief

Kenya’s top lenders could be denying their customers close to Sh6.29 billion in loan interest reliefs after the Central Bank of Kenya (CBK) lowered its benchmark rate in November last year.

Market enquiries indicate that KCB, NCBA, Equity Bank and I&M Bank — with a combined loan book of Sh1.258 trillion — are yet to send out notices to their customers to adjust loan rates close to two months after the Central Bank Rate (CBR) was cut from nine to 8.5 percent.

The banks were still charging 13 percent on loans as at Monday even as the CBR was further lowered to 8.25 percent following a meeting of the Monetary Policy Committee (MPC).

The Business Daily reached out to Equity, KCB and I&M but the banks were yet to comment on the matter by press time Monday.

NCBA said that “all contracts pegged to CBR were lowered in line with the change to CBR rate”. However, insiders at the lender, speaking on condition of anonymity, said this was yet to be done. So far, Standard Chartered, Barclays, Co-operative and Stanbic banks have lowered their rates to 12.5 percent.

“Dear customer, your loan interest rate is now 12.5 percent effective 27/12/19. Call or visit any of our branches for more information,” Barclays Bank said in a message to a customer seen by the Business Daily.

Sources in the banking industry said that varied interpretations of the repealed Section 33B of the Banking Act and a CBK circular on how to implement the changes effected through the Finance Act 2019, were to blame for the confusion that could be costing borrowers reliefs.

When Parliament repealed the law, it sought to protect borrowers by inserting a clause that forced banks to maintain the terms on the old loans.

“Notwithstanding the repeal of Section 33B, any agreement or arrangement to borrow or lend which was made or entered into, or varied pursuant to the provision of Section 33B (now repealed) shall continue to be in force on such terms including interest rates for the duration specified in the agreement or arrangement. Provided that the interest rate chargeable under the agreement or arrangement may be varied downwards,” the Finance Act 2019 reads.

This would mean that all the existing loan contracts that had been charged at four percentage points above the CBR would be set at a lower 12.5 percent — in tandem with the lowering of the CBR from nine to 8.5 percent in November and 8.25 percent this month.

CBK interpreted the repealed clause to mean that banks could either retain the contracts or change them. If they opted to change the contracts, they could only do so by fixing the rate at 13 percent — a position that would require a new contract with the bank.

“The import of the new section is that banks cannot revise interest rates upwards for credit facilities entered into while the interest rate caps were in force. In the circumstances, unless revised downwards, the interest rates on such loans remain fixed until the loans are in full course,” CBK said in a circular.

Sources said the challenges facing borrowers did not end there. Some of the banks that had lowered their loan rates have shortened the repayment period, essentially varying contracts. This means that a borrower is denied some relief on cash flow because banks are keen on getting rid of the old loan books faster to pave way for new loans charged at rates outside the rate cap.

One banker said the repayment period was shortened because customers had already committed to paying the sum prescribed in the loan contract. Another banker defended the shortened loan repayment period, arguing that it did not affect their customers in any way.

“When you reduce rates, it means customers will take a shorter period to pay. Clients had committed to paying those amounts per month so it should be no problem. We are only looking at faster repayments,” StanChart CEO Kariuki Ngari said. His view was echoed by another banking CEO.

Mr Ngari also said that if the CBR was adjusted upwards, the banks that have lowered loan charges would review their rates in line with the interest rate.

Central Bank was yet to respond to Business Daily queries seeking clarity on the matter while the Kenya Bankers Association said banks were fully compliant. “Banks are fully compliant with the Banking Amendment Act on the repeal of the interest rate cap, as well as, the amendment on the retention of the existing terms,” said Raimond Molenje, KBA’s Head of Legal. “Any adjustments to loans advanced prior to November 7, 2019 would be in line with the individual contractual terms and agreement as signed between the bank and the customer, and the Central Bank of Kenya as the regulator has visibility of all the portfolio pre and post rate cap repeal.”