KIRUKU: No longer will banks be economic saboteurs

KIRUKU: No longer will banks be economic saboteurs

The signing into law of the Banking Act (Amendment Bill) to cap interest rates by banks in Kenya should be emulated by the region at large. It is a move that will see businesses flourish and lives improve for the better.

Banks in Kenya will now be forced to set their loan interest rates at not more than 4 per cent above the Central Bank’s base lending rate, which currently stands at 10.5 per cent. This means that for the time being, no bank can charge an interest rate of more than 14.5 per cent.

Banks across the region have enjoyed a free hand in setting loan interest rates, which has seen many banks raising this to more than 10 per cent above the Central Bank’s base lending rate. This has pushed thousands of borrowers to absolute poverty, with their property getting auctioned after being unable to pay back their loans.

It is no wonder that recent reports indicate that Kenya’s financial sector has been the fastest growing in Africa, with many international financial institutions seeking a foothold in the country to reap from the ever-expanding sector.

Despite the fact that the Bill received stiff resistance from banks and powerful backing from the Treasury Cabinet Secretary, the Ministry of Finance and the Central Bank Governor, President Uhuru Kenyatta still went ahead and signed it into law. This created excitement among a majority of Kenyans who have suffered for years in the hands of banks, who charge extremely high interest rates to enjoy their super profits.

Although in their defence the banks had proposed to set aside a Ksh 30 billion ($300 million) fund to lend to small-scale traders and workers, this was interpreted by most people as yet another public relations gimmick.

Worst affected by the usury by banks are women-owned businesses across the region, who have been forced to seek alternative lenders due to the high bank interest rates and demands for collateral. In the process, they have fallen prey to backstreet microfinance institutions with even more extortionist interest rates.

The Solomonic move by President Kenyatta should now be extended to these non-bank financial institutions, which have also been fleecing small-time borrowers. Due to the lack of collateral demanded by banks, many SMEs have turned to these shylocks, leading to the failure of most small business within the first year of operations.

The region should now be courageous enough and borrow a leaf from countries which have better banking laws to protect the borrowers from exploitation by the financial sector.

For example, the In Duplum rule which originated from South Africa has ensured that interest, whether it accrues as simple or compound interest, ceases to accumulate once the accrued interest equals the amount outstanding, whether the debt arises as a result of a financial loan or out of any contract whereby a capital sum is payable together with interest thereon at a determined rate.

The rule, so far adopted in Kenya, should be duplicated across the region if we are to ensure the growth of small enterprises which are the backbone of the regional economy grow.

Regional governments should ensure, too, that there is a strong consumer protection framework through introduction of greater transparency about the goods and services offered by financial institutions. This will ensure customers are well aware of the deals they are entering into before signing the dotted line.

As things stand, most borrowers have found themselves at loggerheads with banks after signing up for loans only, to find out later that there were more hidden charges. Many borrowers have lost a fortune to banks, who come knocking and auctioning collateral after inability to pay back, partly due to the high interest rates. Education of customers will thus eliminate unfair practices, fraud and unfair competition in the market place.

Although the region’s financial sector has considerable consumer protection laws in deposit and loan services, most countries often fail to address concerns specific to the financial services industry. Enforcement mechanisms are also weak, partially due to lack of resources, institutional capacity, and limited enforcement powers for regulators.

Capping of interest rates charged by banks is a step in the right direction. It creates the kind of environment that puts Kenya firmly on the leader’s seat not just as an economic powerhouse, but in matters of progressive social engagement as well.

This will ensure the sector works to the benefit of the whole economy, protecting borrowers while enhancing the growth of SMEs. The reform of the banking sector is a key plank in our economies that was long, long overdue.

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Story By Anne Kiruku
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