Ambiguities in a proposed law set to cap interest rates could come a cropper even if President Uhuru Kenyatta were to assent to it following lack of clarity in its wording.
The Banking Act (Amendment) Bill 2015 that proposes insertion of new sections immediately after Section 31 is shy of stating the actual base rate that should apply in capping interest rates.
“The maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent, (above) the base rate set and published by the Central Bank of Kenya,” reads part of the amendment.
“Minimum interest rate granted on a deposit held in interest earning in Kenya to at least seventy per cent, (above) the base rate,” the Bill further says. Thus, the big question is whether the Bill refers to the Central Bank Rate (CBR) or Kenya Banks’ Reference Rate (KBRR).
The media helped play up this ambiguity after the Central Bank of Kenya’s Monetary Policy Committee (MPC) announced the CBR last month.
When the committee reported that the CBR had been retained at 10.5 per cent effective July 25, it also reviewed the Kenya Banks’ Reference Rate (KBRR) downwards to 8.9 per cent from 9.87 per cent. Somehow, the media capped interest rates based on the CBR instead of KBRR.
The lack of clarity is raising concerns that this could be a legal landmine. Wilfred Onono of Interest Rates Advisory Centre agrees the Bill makes reference to a base rate which is not defined, hence leaving it to people’s imagination.
“The capping estimate they are giving is 14.5 per cent which is arrived at from the CBR as opposed to the KBRR,” he said, adding that the CBR is what the regulator uses when lending money to banks or when it wants to mop up excess liquidity from the market.
“To me, the base rate is the KBRR and not CBR and we, therefore, need to have a clear distinction between the two in this case. The interest rates capping estimates should be derived from the KBRR rate of 8.9 per cent plus four per cent which equals 12.9 per cent and not the 14.5 per cent,” he told People Daily.
CBK usually publishes the lowest rate of interest it charges on loans it lends to banks but it has set KBRR as the uniform base lending rate across the banking sector to enable consumers to compare the pricing of loan products.
The KBRR is computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill rate. CBK, through the monetary committee, reviews the KBRR every six months to enhance credit access and lower the overall cost of credit to borrowers.
As Parliament moved to amend the Banking Act, which now awaits an Executive decision, several proposals have recently been presented by, among others, the Kenya Bankers Association on how to fix the problem of high interest rates and cushion borrowers who pay up to 25 per cent interest rates.
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