How banks have implemented the interest rate law so far


There has been some confusion in the banking industry on what base rate to use when pricing loans after the banking amendment act was passed into law. This is because there are two rates that have been in use, that is the Central Bank Rate (CBR) and Kenya Banks Reference Rate (KBRR). This confusion led to one activist Omkiyah Omtata to file a case in court to have the banks use the KBRR which is lower. Currently the CBR is set at 10.5 per cent while the KBRR is set at 8.9 per cent.

The KBRR was introduced in July 2014 after discussions were held between banks, mortgage finance institutions, Kenya Bankers Association, CBK and the National Treasury. The CBK defines the KBRR as the base rate for lending by commercial banks and microfinance banks as well as for pricing mortgage products. When the KBRR was effected the aim was to have a base rate that the banks could use when pricing their loans with the hope that it would lower the cost of credit. However, this did not work as banks continued charging exorbitant rates. Ironically the KBRR was set after the CBR which was introduced in 2006 to serve the same purpose failed. When the KBRR was introduced one Carol Musyoka described it as akin to “putting lipstick on a pig.”

However, this debate on what rate to use was put to rest yesterday when the CBK announced that the base rate to be used when pricing loans was the CBR and not the KBRR. The Central Bank seems to have come to the aid of banks which had taken a beating from the interest rates cap. A lower interest rate of 12.9 per cent would certainly have meant lower profits.

The uncertainty had seen the Commercial Bank of Africa (CBA) break ranks with the banking industry and announce that they will be using the KBRR to price their loans. This meant that their loans would have been priced at 12.9 per cent.

They quickly back tracked and announced that they will price their loans using the CBR after the Central Bank’s announcement.

As the banks rushed to lower their interest rates, the question of the rates for the short term loans offered by banks and other mobile loan service provider cropped up. Being that some of the providers were not banks or micro finance institutions as envisioned by the Banking Amendment Act they were not affected. However, some of the providers are actual banks for example the Mshwari service is a colloboration between CBA and Safaricom while Eazzy loan is provided by Equity via their Equitel platform. The expectation was that these banks would comply and cap their mobile loan rates at the prescibed rate of 14.5 per cent.

Equity bank has taken a lead on this via a press release in which they have stated that they will cap all the loans at 14.5 per cent including the mobile loans. Here is an extract from the press release;

The Banking (Amendment) Act 2016  section 33(1) (a) says “ the maximum interest rate chargeable for a  credit facility in Kenya at no more than four percent, the base rate set and published by the Central Bank of Kenya….”  Equity Bank has interpreted “credit facility” to mean any form of financial accommodation extended to a customer through institutions licensed by the Central Bank under the Banking Act irrespective of the various channels. The desire to provide ceilings is a clearly discernible intent of the law as evidenced by the Memorandum of Objects and Reasons to The Banking Act (Amendment) Bill, 2015.  The Act further prohibits any person from entering into an agreement/arrangement to borrow or lend directly or indirectly at an interest not accordance thereof.

In this regard, Equity Bank has interpreted this to include all credit facilities extended to customers by such institutions. This includes loans through mobile phones or through other third party platforms or collaborations with Mobile Network Operators (MNOs), credit card facilities as well as micro finance loans. The Act in section 33(B) (2) further says “A person shall not enter into an agreement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law”.  The fact that this prohibition extends to all categories of persons including lenders and borrowers clearly makes out a case for wide interpretation. 

CBA on the other hand has only revised the interest rates on deposits held in Mshwari while their loan interest rate remains at 7.5 per cent per month.

However, when you do the math a monthly interest rate of 7.5% translates to a whopping 90.37 % per year against the prescribed rate of 14.5%. It is understandable that no business would be willing to let go of their cash cow without a fight but it is our hope that they will do the right thing soon.

KCB Mpesa a colloboration between Kenya Commercial Bank and Mpesa has since announced that they will give out mobile loans at an interest rate of 1.2 % monthly.

They also announced that they have reduced the rates on their other loans in a series of tweets.

The other banks have seem to have implemented the rate caps quietly and are sending their customers text messages.


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