Kenya: New rules put pressure on banks over interest

Banks will be required to notify borrowers on any changes in interest rates and other charges at least one month before adjusting the cost of loans once new rules published by the regulator become effective next month.

The Central Bank of Kenya (CBK) says the rules are meant to address borrowers’ complaints over arbitrary increases in interest rates and other charges without prior notice.

“An institution shall ensure that a consumer is notified at least 30 days in advance before implementing any changes to the terms and conditions,” states the new guidelines published by the regulator.

Administrative or processing fees and other charges levied on loans are also set to be capped at two per cent of the value of the loan, says the CBK’s Draft Revised Prudential Guidelines.

The industry has maintained an average of about three per cent of the loan, and the cap in levies represents a loss of revenue for the lenders.

Banks will also have to disclose to borrowers the total cost of a loan including interest rates, fee and commissions as well as any third-party charges that including insurance, legal, brokerage, valuation, government levies and securitisation charges, among others.

Banks and consumer groups are expected to present their opinion on the draft rules by the end of next week, while implementation will begin on July 1.

It is the first time that the guidelines are being overhauled since 2006. The loans to be affected by the new guidelines must be at least Sh50,000 and above.

ALSO READ: CBK abolishes levies on accounts to encourage savings

Borrowers and other consumers of banking products will be given a window of five days —excluding weekends and public holidays —to decide whether they want to take up a new loan or fulfil a contract that they have signed.

Previously, such customers were required to accept or reject their loan contract within 24 hours.

Bankers said that they were still studying the proposals before making their opinion public.

“We have not yet deliberated on the proposals because they have just been published. We will, however, be soon discussing them and make our position clear,” said Habil Olaka, the CEO of the Kenya Bankers Association (KBA).

A banker who had participated in discussions on the ways to address the causes for high spread between deposit and lending interest rates said that the regulations were among the issues that had featured in their discussions in the past few months.

“We have deliberated on some of the issues that have been preventing the banking industry from being efficient and treating the consumers in the right way. These guidelines show some progress is being made,” said the banker.

But the source, who asked for anonymity in order to speak candidly, said that the full extent of the changes needed in the industry was still a matter of ongoing discussions.

A meeting among key stakeholders – including the Central Bank, the Treasury, MPs, banks, and consultants is scheduled to happen “soon,” according to the banker.

The CBK proposals further seeks to protect family members of a borrower from repaying loans they have not guaranteed.

In the event that a loan goes bad and a property has to be sold, the guidelines say the commercial bank must get a price that is equivalent to that in the market or fair value for the same asset.

“Institutions shall display, in a prominent place, in their places of business, information relating to fees and charges relating to their products which would enable the customer to obtain the desired information at a quick glance,” said the guidelines.

Impose charges

Financial institutions will also not be allowed to impose charges on dormant current accounts.

“Current accounts should not attract charges once they are deemed dormant. Dormancy for the purposes of these guidelines is lack of activity in an account for a period of six months,” said the guidelines.

Consumers of financial products will have a responsibility to, among other things, ensure that they have understood the characteristics of the products and services provided by their institution and read and understand the terms and conditions of any agreement that they sign.

Further, customers are expected to provide truthful and timely information such as “disclosing their credit history, financial means and any information necessary to enable the provider make an informed decision.”

Source: www.businessdailyafrica.com

<back