Commercial banks have been asked to immediately stop charging their customers any new levies introduced following the coming into force of a new law capping interest rates.

Central Bank of Kenya’s (CBK) director in charge of Bank Supervision Gerald Nyaoma says in a circular to chief executives of commercial banks and mortgage finance companies that the regulator has in recent weeks received numerous applications from banking institutions seeking approval to increase charges on products.

The letter, dated October 3, also says that the CBK has received mounting complaints over ongoing introduction of new arbitrary charges since the Banking (Amendment) Act 2016 came into force on September 14, whose effect is to nullify any gains to customers of the new law capping interest rates.

“The CBK has also received a number of complaints from bank customers stating that their banks have imposed arbitrary charges or unilaterally converted their savings accounts into transactional accounts, and thereby losing the benefits that were accruing from their savings accounts,” Mr Nyaoma says in the circular.

The letter, which is copied to Kenya Bankers Association (KBA) chief executive Habil Olaka, declares the new fees illegal, and reminds bank CEOs that any change in any feature of an approved product without prior approval of CBK is also illegal, adding that any bank executive acting in breach of the law faces hefty fines and sanctions, including loss of operating licences.

“Any changes which may have been effected by institutions without the requisite CBK approval should be reversed immediately,” the circular says – meaning banks that have converted their customers’ savings accounts into current accounts must reverse the action.

“Any conversion of a savings, seven-day or fixed deposit account product to a transaction account by any institution should be reversed immediately.”
Mr Nyaoma says banks and institutions that violate the new law will face harsh sanctions including hefty fines and even loss of bank licenses.

Case by case basis

“The CBK will follow up, on a case by case basis, with any institution which may have violated the law relating to approval of charges and products and appropriate action shall be taken against the affected institution,” says the circular.

Financial institutions are obliged under the law to amend their respective contracts with borrowers to incorporate the new legal requirement on disclosure of charges and terms.

Reports of the new tactics by banks have elicited sharp reactions from proponents of the interest rates capping law who have been asking the CBK to act.
Jude Njomo, the architect of the new law, said Parliament had taken note of calculated efforts by banks to charge high interest rates through the back door.

“I am aware that the Central Bank has issues a warning but I would like it, as the industry regulator, to stamp its foot down and ensure no Kenyan is exploited,” he said.

Consumer lobby, the Consumers Federation of Kenya (Cofek), has faulted the CBK for failing to immediately crack the whip on rogue banks breaching the law.

“The Central Bank of Kenya has no business reminding people to follow the law. It has a business to crack the whip. What we expected from Central Bank was that Bank “X” or “Y” is not doing this and these are the sanctions or that they show cause why this should not be done,” said Cofek secretary- general Stephen Mutoro in an interview adding that the CBK’s message is akin to reminding the banks not to be caught pants down.

Credit: Business Daily