Thu, Oct 6, 2016
A critical analysis on the impact of the amendments to the Banking Act in Kenya on mobile loan products offered by banks.
On July 28, 2016, the National Assembly passed the Banking (Amendment) Bill, 2015 and there was a sigh of relief from Kenyans who eagerly awaited its assent. To the joy of many the president assented to the bill on Wednesday 24th August 2016. The regulator immediately after the assent to the bill announced that it would give its best efforts to support the full implementation of the amended act.
Never has such a small piece of legislation stirred up the financial sector in Kenya in the entire history of banking. There was a frenzy as there was no express statement on the enactment date, this matter was put to rest when the commencement date was set for the 14th of September 2016.
Section two of the bill made it a regulatory requirement for banks and financial institutions to disclose all charges and terms relating to the loan before lending to a borrower. Well this section didn’t send chills down anyone’s spine as almost all banks and other financial institutions had already began the practice.
Section 3 of bill that inserted section 33B to the banking act is where all the hullabaloo is and it has left no player in the banking and finance sector unaffected least of all mobile banking. Section 33. B (1) ( a) The amendment refers to the “base rate set and published by the Central Bank of Kenya”. Since the CBK publishes two rates there were different interpretations of the base rate referred to in the Amendment Act with some using the CBR while others applied the KBRR. The Central Baking Rate (CBR) which was recently lowered to 10% was implemented by some banks which currently leads to a rate of about 14% in accordance with the law. The Kenya Bankers Reference Rate (KBRR) on the other hand is currently 8.9% and leads to a rate of about 12.9 as was adopted by CBA Bank on the 9th of September 2016.
The above confusion in regards to the rates was clarified on the through a circular which stated that the rate to be used is the Central Bank Rate. The banks which had implemented the rates based on the CBR rate had a sigh of relief. For those who had chosen to use the KBRR the question begs, did they shoot themselves in the foot? It is a wonder if they will quietly move to the CBR rate or if they will swallow humble pie and pray that there will be a rush by customers who will prefer their cheaper facilities.
Some banks have rushed to secure their mobile loans gravy train by flexing their linguistic muscles in coming up with various interpretations of the amendment act in order to distinguish the mobile loan lending business from other types of credit. One described their product as “fee based” a one-time facility therefore the charge is not an interest. Through this interpretation the institution stated that mobile loans would not fall under the purview of the amended act. Another stated correctly that the law does not speak about microfinance institutions however that is only as far as my agreement with their interpretation goes. To further add that mobile lending is a micro-business product in the industry and therefore not subject to the amended act is in my opinion a skewed interpretation of the aspirations of the act. The main test here should be, is the institution a bank or a financial institution under the Banking Act, and if this is answered in the affirmative then products offered by the institution must be in line with the new amendment.
There is an intentional selective adaptation of the amended laws for the same products by some banks where messages were sent to users that interests on deposits in mobile accounts would kept at 70% of the banking rate in line with the act, so why would the rates be adopted in regards to section 33B(1) (b) while going round section 33B(1)(a) in the name of “fees” on mobile loans which essentially means that the interest is about 70% to 100% above the regulatory guidelines.
Some banks have however stepped up to what I consider the true interpretation of the act whereby mobile loans will be charged at 4% above the CBR rate. One of the institutions stated that one can’t partner with a telco or a FinTech and pretend to be outside the law. If the banks offering mobile loans consider themselves “persons” in respect to the amended act then they may have no option but to comply with the new law.
More often than not, these facilities are taken up by low income business people who deserve the full protection of the law more so because most of the time these are the only kinds of loans they have access to. It is currently a situation where the huge players are reaping the most from the least privileged lot of borrowers, and is a true reflection of how expensive it is to be poor or to have limited options.
Huge figures are at play in the mobile lending space with Equity having lent 27 billion through mobile loans while CBA lent 40 billion through M-shwari by the end of last year. The profits on these amounts based on the almost 70-100 percent interest rates are mind boggling, with the added advantage of being technology driven products therefore considerably cheaper to administer than traditional products. Short term expensive loans have been a cash cow for banks, with a cap on interest that can be earned from traditional loan facilities and mortgages some banks would hate to lose the lucrative gains from mobile loans.
The regulator was quick to give directions on the rate to be used by banks for their traditional facilities however the ambiguity in regards to mobile loans must be laid to rest. For all intents and purposes loans given as products by banking institutions should fall under the new act, moreover the mobile accounts are basically bank accounts for all intents and purposes and should be treated as such. The regulator should give direction as soon as possible in regards to the application of the interest rates on mobile banking products.
The several non- bank based lending platforms available in the Kenyan market may be left “smiling all the way to the bank” so to speak since they are not banks and would therefore not be affected by the laws. For the first time in the Kenyan FinTech space it is actually an advantage not to be a bank.
Lawyer- LLB University of Nairobi. Advocate in Kenya