Yesterday, the President finally signed the Banking Amendment bill 2015 into law. This I have to say was a pleasant surprise given the fact that similar bills had been rejected in the past and more so due to the fact that the President’s family owns a bank. My guess is that being in the campaign season he could not be seen as siding with banks at the expense of the ordinary mwananchi. The bill now only awaits gazettement within 7 days by the Attorney General in which he will set out the effective date that customers will start enjoying lower interest rates.
The new law sets out a maximum interest rate to be charged for a loan at no more than 4% of the rate set and published by the Central Bank of Kenya (CBK). It also sets out the minimum amount of interest to be paid for bank deposits at 70% of the CBK rate, given that the CBK rate currently stands at 10.5% the effective rate would be 7.35%.
This law has effectively turned the banking sector normally accustomed to supernormal profits upside down. This is due to the fact that the model that they have relied on to make the profits has been curtailed. Banks basically make a profit from taking deposits from customers at very low rates and thereafter giving out these deposits as loans expensively. They will now be forced to become a bit creative in the way they do business in order to survive.
As it is, bank listed on the Nairobi Securities Exchange (NSE) have begun to feel the heat of the new law as investors dump the stock due to fears of decreased earnings. However, I am of the view that the banks will be able to get out of this rut and in my opinion this is the best time to buy this stock while its still cheap.
How will the new law affect you as a borrower?
Cheaper loans
This is the main aim of this bill due to the fact that Kenyans have for long suffered high interest rates. For those who already have loans they will be able to let out a sigh of relief as their monthly repayments will automatically go down. The amounts saved will enable them increase their earnings and spending power. Whereas those previously locked out of the credit market by the high interest rates will be able to take out loans at more affordable rates.
Use of Credit Score by Banks
Part of the reason why banks charge high interest rates on unsecured loans is that they are usually considered to be risky. Being unsecured basically means that there is no collateral that a bank can sell in case of default hence the risk. Banks will most probably start lending to those that they feel are less risky or basically those with a high credit score. This will effectively lock out many people who might have defaulted on a loan in the past leading to a bad credit rating. This includes defaulted Mshwari loans.
Scrapping of Savings Accounts
In the past banks have been making money from the deposits held in savings accounts for which they paid negligible interest rates. With the passing of the Act, I foresee a situation whereby savings account will be scrapped in favour of current accounts in which banks do not have to pay interest on the deposits. With a current account the customer is the one who pays the bank to maintain the account.
Lending to the Government
Banks will now favour lending to the government which is considered less risky than lending to individuals. Already Standard Chartered and Equity have announced major investments in government securities and a reduction in personal lending. Given this government’s appetite for debt this will definitely lock in funds that would have otherwise been given out as loans to individuals and corporates. Simply put the dream of cheap credit will not be realised till the government tames its borrowing in the domestic market.
Focus on Secured Lending
Banks will also most likely focus on secured lending which is considered less risky. This will effectively lock out many individuals who might not have collateral like land that can be used to secure a loan. It will also affect most SMEs who might also not have collateral to put up as security.
Mobile money loans offered by banks like Eazzy loan, Mshwari and KCB Mpesa will be affected by the new law. However, other independent mobile credit providers like Branch, Tala and Pata Pesa will not be affected.
Other than the independent mobile credit providers the other beneficiaries in the event that banks and other financial institutions decline to lend to individuals will be Savings and Credit Cooperative Societies (Saccos). They usually offer better credit terms and flexible repayment periods to members unlike banks. Here is a list of the licensed deposit taking Saccos.