On 14 September, Uhuru Kenyatta’s Kenyan government shocked the banking industry by passing the Banking (Amendment) Act 2016 (the Act), making it a criminal offence for commercial lenders to charge interest of more than 4% above the central bank rate, which as of 20 September stood at 10%.
Under the same law, banks must pay savers at least 70% of the central bank rate on their deposits.
Despite its political popularity, the Central Bank of Kenya (CBK) is concerned that the Act may result in a decline in business lending. Furthermore, both the banking industry and law-makers themselves remain unsure as to the Act’s scope and application.
In spite of these concerns, for a country which saw credit growth fall by more than 10% in the last year, the news was welcomed by much of the national press. And for one of the continent’s largest frontier markets, the government hopes the move will create opportunities for businesses to access cheaper and more accessible finance.
So far, so good. However, the CBK is concerned that the cap will actually make it harder for certain companies to access credit. For example, start-up businesses with few assets and weak credit scores now represent an investment risk which a lender can no longer partly offset by imposing a corresponding higher interest rate.
These fears are compounded by the fact that yields on government debt have hovered around 14% over the past year. The result is that commercial lenders in Kenya are now effectively being asked to charge the same rate of interest on a loan to a risky commercial entity as they would if they bought Kenyan government securities. This has led central bankers to question why commercial lenders in Kenya would take such a risk on investment.
The banking industry is still grappling with the legal scope and application of the Act. In addition to a lack of clarity as to which banking products are affected - the Act uses the terms ‘loan’ and ‘credit facility’ almost interchangeably - it is uncertain whether or not it will apply retrospectively to existing loans or only to new ones. To the extent it has retrospective effect, lenders currently charging higher rates of interest may be forced to amend these rates under their existing facility agreements. Even if the Act does not apply retrospectively, it is still unclear whether future tranches of loans to be drawn down under an existing facility, or the issuance of a new facility letter, could also trigger the Act’s interest-rate restrictions. Clarity is also required on whether the caps apply to default interest.
There is also uncertainty around whether the Act applies only to KES-denominated loans or also to foreign currency loans – and what about facilities which have both local and foreign currency tranches?
Furthermore, a strict interpretation of the Act suggests that foreign lenders are not affected by the changes, as they do not fall under the jurisdiction of the Central Bank of Kenya. However, given the vagueness of other aspects of the Act, it may be that this position will require judicial confirmation.
As it stands, it is clear that there will be much to iron out in implementing the Act, with local legal opinion agreed that it is, in places, ambiguous. For now, we await further guidance from Kenyan law-makers on how best to advise borrowers and lenders involved in financing transactions in Kenya.
Inside Africa would like to thank our guest author Michael Kontos of Walker Kontos and Peter Critchley, Trainee, for their contribution to this blog post.