BANKING (AMENDMENT) BILL 2015 What is the way forward?

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1 BANKING (AMENDMENT) BILL 2015 What is the way forward? FROM THE REAL ESTATE DEPARTMENT By: Catherine Kariuki Telephone: Website:

2 The Banking (Amendment) Bill, 2015 was passed in its 3 rd Reading and is now awaiting presidential assent. The Bill was sponsored by lawmaker Jude Njomo. The Bill proposes to amend Section 33A of the Banking Act by inserting an additional Section 33B which gives power to The Central Bank of Kenya to enforce interest ceilings. It caps the ceiling for lending at 4 per centum above the Central Bank base rate and further provides the minimum interest rate on deposits at 70 per cent of the Central Bank Base Rate. Contravention of the above provisions has been criminalized and upon conviction, the bank is liable to a fine not less than Kenya Shillings One Million and or imprisonment (presumably for executive officers guilty of non-compliance) for a term of not less than one year or both. Similar attempts have been made in parliament in the past, albeit unsuccessfully. In 2012, the same changes were proposed as an amendment to the Finance Bill and actually held up passage of the Bill until it was dropped. In 2014, the Central Bank of Kenya directed that Banks base interest rates on the Kenya Bank s Reference Rate (KBRR). The challenge that arose was transparency on information regarding how the margin above the KBRR was arrived at by the various banks. Banks were not obliged to declare to the customer the costs informing the said margins. In the year 2015, the same Bill was introduced but was rejected for being unconstitutional as it infringed Article 114 which requires that all finance bills must be passed in accordance with recommendations of the relevant committee of the National Assembly. Further, the relevant stakeholder participation had not been sought. It is not immediately apparent what level of public participation and scrutiny the re-introduced bill was subjected to this time around as it passed the 3 rd reading. Arguments for some form of price control in the banking sector have been based on the fact that the banking industry is by and large controlled by a few banks. This means that the prevailing interest rates are not necessarily a reflection of the market forces of

3 demand and supply but rather can be seen as a manipulation by the few and consequently, borrowers have always had low bargaining power. The counter-arguments that have been advanced against this are based on the consequences of interference on the forces of demand and supply. Obviously if the law gets passed lenders may adopt a more selective approach in profiling borrowers due to the risk associated with default. One may argue that with the credit reference bureaus now in place, banks have a more centralized information hub for use in assessing the credit rating of borrowers. Also, financiers may impose more stringent terms of lending for instance shorter payment periods, minimum loan amounts and higher transaction costs. For high risk borrowers who will find it hard to access financing, we may see a sprouting of shadow banking in the industry. Banks may also circumvent the caps through introduction of additional charges. If the bill is assented to, individuals with existing loans will inevitably seek to renegotiate interest rates with the existing lenders or approach other banks to buy out their loans. Considering there is no penalty on early repayment, the costs associated with this move shall not be so punitive to the borrower. Smaller banks have historically been providing loans at a higher cost, obviously due to the interbank lending and high cost of borrowing associated with it. They shall obviously be the most affected if this bill is assented to. We are likely to see merging of the smaller banks with the larger banks or even exits from the Kenyan market. it is expected that this also may affect lending by SACCOS. They may be forced to lower their rates in order to remain relevant in the lending sphere. It could also see a large number of high risk borrowers seek lending from these informal lending bodies. Going forward

4 This bill contradicts the spirit of the current government s policies which advocates for an environment where interest rates are determined by market forces. Further, the Central Bank of Kenya (CBK) through a press release dated 28th July 2016 expressed concern on the adverse effects of interest capping. In our opinion CBK would at this stage be an important stakeholder in lobbying to influence the decision of his Excellency the President of Kenya to assent or not to assent the said bill. Further recourse may be gained by lobbying the Attorney General who is charged with advising the Government on legislative and other legal matters. Kenya Bankers Association must facilitate the lobbying process. Under the Constitution of Kenya, after receipt of a Bill for assent, the president may assent to it or refer it back to Parliament for reconsideration, noting any reservations or concerns he has. Upon receipt of the bill for reconsideration by parliament, it could be passed a second time as it is or amended in light of the reservations expressed. If passed a second time without amendment, the bill has to be supported by at least 2/3 of the members of the National Assembly and this time the president must assent to it within 7 days of receipt. Putting a cap on the lending rates chargeable by commercial banks will continue to be moot issue. It is important to find lasting solutions by dealing with the underlying factors that cause interest rates to go up other than over-regulating the market. It is important to realize that a free market allows banks to be innovative and allows for greater financial inclusion of consumers. The amendment, if passed into law, may in our opinion greatly hamper this financial inclusion and may thus be seen as a direct violation of the right to access information and to public participation as provided in our constitution. If the president does not assent to the Bill and sends it back to parliament, perhaps the National Assembly should have regard to an alternative avenue of addressing the issue at hand in enacting better consumer protection laws in a way that would enhance consumer power in this area as opposed to the attempted price control. Article 46 of the Constitution guarantees consumers rights and provides that consumers have a right to information necessary for them to gain full benefit from goods or services.

5 In the event that the bill is passed into law, recourse remains in seeking a further amendment to the Bill or seeking to have the said flawed provisions declared unconstitutional through a Petition to the High court as was achieved in the Security Laws (Amendment) Act, 2014 No. 19 of In that instance, the proposed amendments in the Bill were considered extensive, controversial and substantial. Following the Presidential assent of the Bill, CORD moved to court on the 23 rd of December 2014 seeking relief to stay the operation of the Act, its Petition was consolidated with that of the KNCHR. The Court in its 2 nd January 2015 ruling granted conservatory orders and suspended the various sections of the Act that were unconstitutional. The import of this was that the same was declared null and void and invalid as being inconsistent with the spirit of the Constitution. It is notable, however that pursuant to the doctrine of separation of powers, the Five judge bench that heard the matter was unable to compel Parliament to re-legislate on the said issue. This obviously left a void in the law. We shall continue to monitor the progress of this bill and keep you updated. For more information on this, kindly contact head of Real Estate and Banking Mr. Tom Onyango tonyango@tripleoklaw.com

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