What the Banking (Amendment) Bill, means for Property Investors in Kenya

President Uhuru Kenyatta on 24th August 2016 signed into law a bill that caps interest rates for bank lending and deposits. The bill dropped lending rates to 15 per cent in reference to the 10.5 per cent key lending rate. The current commercial bank lending rates average 20 per cent with others to the highs of up to 24 per cent depending on the risks involved. Following the decision, Shares in Kenyan banks suffered their worst falls in years as investors reacted to President Uhuru Kenyatta’s unexpected decision to sign legislation capping interest rates on loans and deposits. KCB, fell 9.9 per cent, its biggest decline in 13 years, to Ks29.50, the lowest level in almost four years. The Co-operative Bank fell 10 per cent, its biggest fall ever, to Ks11.95 shillings and Barclays Kenya fell 8.75 per cent to Ks8.85 during the same week.

The law has been seen as an effort by the law makers to introduce consumer protection measures and to reduce the discretion of the banking and financial institutions in interest charged for loans .As a property investor in Kenya, what does the bill therefore mean for you?

Section 31A of the Banking Act requires a financial institution that will provide loans for your development project to explain to you the interest rate charges and duration of payment. This will equip you with the knowledge you require to decide on whether you can afford to take up the loan in the first place based on the fact that you will now have an accurate view of you obligations and the terms of borrowing. As a developer, this knowledge will also come in handy when you need to compare loan offers across several banks before settling on a particular institution. This transparency is said to go a long way in restoring the trust of the “common mwananchi” to the banks, which has been declining in the past following the collapse of banking institutions like Imperial Bank and receivership of Chase Bank.

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Section 33B (1) (a) of the Act  enables you as a real estate developer seeking a loan, to  predict the possible maximum interest on a loan you want to take using the base rate, as would be declared by the Central Bank at the time of lending. This act restricts banking and financial institutions from setting their own interest rates for loans. The Act specifically states that no banking institution should issue a loan and charge an interest rate that is more than 4 percentage points above a base rate set by the Central Bank of Kenya. This therefore means that banks will no longer have different rates for different borrowers, therefore providing predictability.

The law also calls for criminal punishment to violations of the Banking Amendments Act of 2015 for both the borrower and the banking institution. Criminal sanctions are attached to banks in case of prohibition of this law. The law states that a person who enters into an agreement or arrangement to borrow or lend at an interest rate in excess of that prescribed and any contravention of the provisions commits an offence which is punishable by a fine of not less than KES 1 million and/or imprisonment for a term of not less than 1 year.

The Bill has however received opposition from The Kenya Bankers Association with banks saying that such a cap would force them to stop lending to high-risk borrowers. The  body further illustrates that there will be no free movement and pricing of labor, capital, goods and services, otherwise referred to as free markets, which usually tends to be strongly correlated with stronger economic growth and prosperity. They further argued that the bill will cripple small and medium enterprises (SMEs) which depend on financial support from banks resulting in interrupted enterprise development, poor performance and unemployment.

Analysts have however said they would only be able to determine the longer term impact on the industry once the central bank publishes details of how the bill would be implemented and whether existing loans would be affected.