Eight Must-Do Things for the Benefits of Banking Amendment Act 2015 to be Realized

The coming into effect of the interest capping law was seen as a sigh of relief for most Kenyans. According to the proponents of the law, Kenyans were set to access affordable loans from financial institutions.

Despite the intense efforts to ensure that the law is effectively implemented, the total cost of credit has remained relatively high and what is more ironic, according to Cytonn, the banks are still not lending to the private sector, as they would still be able to make attractive margins at the current levels.

The reduced lending can be evidenced by the paltry loan growth recorded by the commercial banks. The average rates for commercial banks’ loans and advances have been 16.5 percent in 2014, 16.1 percent in 2015 and 16.5 percent in 2016, while the rate over the year 2017 has been fixed at 14.0 percent.

For the interest capping law to be a success, the following eight things should be considered:

1. Repeal or at least significantly review the Banking (Amendment) Act 2015, given the current regulatory framework has proved to be a hindrance to credit growth, evidenced by the continued decline of private sector credit growth, which is at 2.0 percent as at October 2017, below the government set target of 18.3%, and compared to 5.4 percent when the amendment was introduced in August 2016,
2. The implementation of a strong consumer protection agency and framework, to include robust disclosures on cost of credit, free and accessible consumer education, enforcement of disclosures on borrowings and interest rates, while also handling issues of contention and concerns from consumers. Following the financial crisis in 2008, the US government set up the Consumer Financial Protection Bureau, responsible for consumer protection in the financial sector, with enforcement actions proving effective in enhancing credit growth, as the agency has realized more than USD 11.7 billion in relief, passing the benefits on to more than 27.0 million consumers,
3. Diversify funding sources, which will enable borrowers to tap into alternative avenues of funding that are more flexible and pocket-friendly, which can be done through the promotion of initiatives for competing and alternative products and channels, in order to make the banking sector more competitive. In a normal developed economy, 40 percent of business comes from the banking sector, with 60 percent coming from non-bank institutional funding. In Kenya, it is at 95 percent of all funding that comes from bank funding, and only 5 percent from non-bank institutional funding, showing that the economy is over-reliant on bank lending and should have more alternative and capital markets products funding businesses. Alternative Investment managers and the Capital Markets Authority need to look at how to enhance non-bank funding, such as high yield investment vehicles, some of which include High Yield Notes and Cash Management Solution, CMS, products. The products offer investors with cash to invest a rate of about 18 percent to 19 percent, equivalent to what the fund takers, such as real estate developers, would have to pay to get funds from the banks. Instead of a saver taking money to the bank and getting negligible returns, they can just invest in a funding vehicle where the business would pay them the same 18 percent to 19 percent that they would pay to get the same money from the bank. For the saver, it helps improve their rate from low rates, at best 7 percent, to as high as 18 percent and for the business seeking to fund, it helps them access funding much faster to grow their business,
4. Level the playing field by making tax incentives available to banks to be also available to non-bank funding entities. For example, providing alternative and capital markets funding organizations with the same withholding tax incentives that banking deposits enjoy, of a 15% final withholding tax,
5. Consumer education, where borrowers are educated on how to be able to access credit, the use of collateral, and establishing a strong credit history. However, this will also require the adoption of risk-based lending by banks where cost of credit varies based on your credit history,
6. Increased transparency, in a bid to spur competitiveness in the banking sector and bring a halt to excessive fees and costs, with recent initiatives by the CBK and KBA, such as the stringent new laws and cost of credit website being commendable initiatives,
7. Improved and more accommodative regulation, such as the Movable Property Security Rights Bill 2017, which seeks to facilitate use of movable assets as collateral for credit facilities, allowing borrowers to use a single asset to access credit from different lenders, and,
8. Have advocacy groups such as the East African Association of Structured Products engage policymakers on the need for alternative and structured products as viable options for bank funding, hence reducing overreliance on banks and increasing competition.