NAIROBI, Kenya, Oct 4 – The Central Bank of Kenya (CBK) has warned banks against increasing charges on their products to counter the new interest rates cap at 4 per cent above the Central Banks’ Rate.
In a circular to banks, CBK Director of Bank supervision Gerald Nyaoma said they are following up on the issue and any institution which may have violated the law relating to the approval of charges appropriate action shall be taken against them.
Nyaoma says any change in any feature of an approved product without the prior approval of CBK is illegal.
He says the regulator has received complaints from bank customers stating that their banks have imposed arbitrary charges or converted their savings accounts into transactional accounts and thereby losing the benefits that were accruing from those savings accounts.
The regulator has also received some applications from institutions seeking approval to increase charges on their products.
“Any changes which may have been effected by institutions without the requisite CBK approval should be reversed immediately,” Nyaoma stated.
He also urged banks who have converted savings, seven – day, call or fixed deposits account product to a transaction account to revert immediately.
Apart from getting approval from the CBK, institutions are required to explain to their customers the reason behind any decision to vary charges or terms and conditions of a contract.
Institutions are also required to notify their customers within a reasonable time – preferably one month – prior to varying any charges.
The new banking law capping interest rates at only 4 per cent above the Central Bank Rate that is now at 10 per cent is expected to see banks re-strategise to survive.
Analysts have predicted the cap will reduce profitability for banks.
Kenyan banks have been enjoying interest rate spreads of about 11.4 per cent on average, way above the world average of 6.6 per cent.
Moreover, their Return on Earnings (ROE) was at 30 per cent while for banks in other places such as Europe it is at 7 per cent, South Africa is at 15 per cent.
According to ICEA Lion Asset Management by ‘squeezing’ banks returns through interest rate caps; there is a risk that the government will slow overall GDP growth by constraining lending growth.
“The Central Bank of Kenya Governor Patrick Njoroge is on record acknowledging that this is too high but he did not advocate for an interest rate peg as it will bring about rigidity in the financial system and may introduce a lot of shadow banking and shylocks as people who can’t access credit from the banks due to their low credit quality are priced out of the market,” the firm said in their latest review.
The firm states that “The move runs against the fundamentals of Kenya’s growth model: Kenya has been able to maintain such high rates of real GDP growth which are now almost twice the average in Sub-Saharan Africa precisely because it relies on investment as opposed to consumption or exports.”