Kenyan Rate-Cap Law Seen Unenforceable as Wording Challenged

  • Banks seeking clarity on which base rate they should use
  • Act as drafted ‘doesn’t make sense,’ lawyer Sejpal says

A new Kenyan law that imposes limits on the amounts commercial banks can charge their customers for loans is unenforceable and requires an amendment to be clarified, according to lawyers.

The Kenya Bankers Association, a lobby group for the industry, has sought clarification from the central bank about whether it should use the Central Bank Rate or the lower Kenya Banks Reference Rate because a new law published on Sept. 1 is unclear. The wording of the law has also been questioned because it stipulates that banks should set their lending rates at “no more than four percent, the base rate set and published.”

Kenya’s biggest lenders have interpreted the legislation to mean they should set their loans at 400 basis points above the CBR, currently at 10.5 percent, instead of the KBRR at 8.9 percent. Central bank Deputy Governor Sheila M’Mbijjewe declined to comment because the matter is in court after an activist demanded that banks use the KBRR.

“As drafted it just doesn’t make sense,” Sonal Sejpal, a director at Anjarwalla & Khanna Advocates, said by phone from Nairobi on Thursday. “If they try to impose this on banks who do not comply, they’re not going to be able to get a judgment against them because it just doesn’t make sense as drafted. Unless it is clarified, it is not enforceable.”

President Uhuru Kenyatta signed the law capping rates on Aug. 24, saying he sympathized with Kenyans frustrated by the cost of credit and poor savings rates. Average commercial lending rates in Kenya stood at 18 percent in June. Shares of KCB Group Ltd., the country’s largest bank by assets, have fallen 15 percent since the announcement, while Equity Group Holdings Ltd., the biggest lender by market value, has slumped 27 percent.

Central bank Governor Patrick Njoroge had opposed the proposal by parliament to cap interest rates, warning in February that regulating loan costs would be “damaging to the economy and regressive to growth.” He has yet to comment publicly on the new law.

“The law is poorly drafted, that is for sure,” said John Ohaga, managing partner at TRIPLEOKLAW Advocates LLP in Nairobi. “It just needs the central bank to state the applicable base rate.”

The central bank may be hesitant to comment on the new law because of the legislation’s lack of clarity, said Sejpal.

Bank Guidelines

The new law doesn’t specify whether further guidelines are necessary, IMF country representative for Kenya Armando Morales said.

“Parliament issued a law, and the law does not say who the implementing party is,” he said by phone. “The law only talks about the banks, so the only mandate in the law is to the banks. So it does not need the central bank to do anything.”

The uncertainty about the legislation means an amendment by lawmakers is required, KBA Chief Executive Officer Habil Olaka said in a phone interview.

“Where there are inconsistencies they will amend the law,” he said. “I can’t project what will happen, but I think that would be the way to go. That is likely to happen.”

Jude Njomo, the lawmaker who spearheaded the amendment that resulted in rates being capped, wasn’t immediately available for comment when called by Bloomberg News.

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