, NAIROBI, Kenya Aug 24 – The signing into law the Banking (Amendment) Bill, 2015, could usher in fundamental changes in the financial sector.
This is after President Uhuru Kenyatta this afternoon signed the bill that seeks to tame interest rates charged by banks and regulate interest paid on deposits.
The President, in a statement explaining his decision to sign the bill into law, said Kenyans had expressed frustration with the lack of sensitivity by banks.
“These frustrations are centred around the cost of credit and the applicable interest rates on their hard-earned deposits. I share these concerns,” said Kenyatta.
The President noted previous attempts by parliament to introduce interest rates to affordable levels caved in to the sector’s promise of self-regulation but banks failed to live up to the promise.
So what does the act, sponsored by Kiambu MP Jude Njomo, mean to customers?
- CBK will now determine interest rates charged by banks
According to the Banking (Amendment) Act, interest rates will now be capped at no more than four percent above the base rate set by the Central Bank of Kenya. The Monetary Policy Committee of the Central Bank sets the CBR, which is currently at 10.5 percent, meaning banks should now charge 14.5 percent interest rate from a high of up to 22 percent. This includes mortgages.
- The act empowers the Central Bank to regulate the deposit rate
According to the act, the minimum interest rate paid on a deposit (in an interest earning account) should be at least seventy per cent of the base rate set and published by the Central Bank of Kenya. CBK set this rate at 6.92 percent in April essentially meaning you can get around 4.9 percent from your deposits.
- It is now illegal to borrow or lend at an interest rate above what is set by the law
Seems obvious that the law should be followed but a financial institution that contravenes the Banking (Amendment) act will be liable to a fine of not less than one million shillings or/and the CEO may be imprisoned for term not less than one year.
- This new law does not affect loans already in place
The law does not affect loans procured before the President signed the bill into law. Customers who had borrowed before today will pay interest rates agreed when the loans were issued. This is because laws are not enacted retrospectively.
Update: Banks that have reviewed the rates in line with the new law say they will wait for CBK’s direction on applying the new cap on existing loans. However, CFC Stanbic has revised rates on existing loans.
In addition, the act has also made it illegal for anyone, except for the Minister of Finance or CBK, to “disclose or publish any information which comes into his possession as a result of the performance of his duties or responsibilities.”
This section may, however, discourage whistleblowers of financial impropriety in banks or government agencies from disclosing such information.