Central Bank has put September 14th as the commencement of the Banking (Amendment Act). In a circular dated 31st August to all chief executives officers of commercial banks and mortgage finance companies, CBK Governor Dr Patrick Njoroge warned that lenders that will charge borrowers more than the specified interest rates after 14th of this month, will be fined Ksh1 million or have the bank’s CEOs jailed for one year.
“A bank or financial institution that contravenes the provisions of subsection (2) commits an offence and shall, on conviction, be liable to a fine of not less than one million shillings, or in default, the CEO of the bank or financial institution shall be liable to imprisonment for a term not less than one year,” said Njoroge in the notice.
He said the law requires lenders to disclose all the charges and terms relating to the loan before entering into agreement with borrower. Also, a lender is required to set the minimum interest rate granted on a deposit held in interest earning to at least 70 per cent of the base rate set by CBK.
CfC Stanbic was the first to lower is interests’ rates to both new and existing loans setting the stage that have seen other lenders who were reluctant to pass the benefits to borrowers follow suit. It has also emerged existing borrowers may have to visit their branches to sign new contracts with their banks to replace the current agreements.
Banks said they cannot prescribe how existing customers will use the excess cash on their monthly loan repayments following reduction in loan rates to 14.5per cent; hence the requirement for branch visits, as the law capping cost of loans became operational on Wednesday.
“If customers want to pay off the loan within the shortest time possible…, we will sign a new contract and carry on with that. If the customer wants to reduce monthly repayment, that is still okay,” KCB’s director for retail banking Annastacia Kimtai added.
“That’s why it is very important for our customers to visit us so they say this is what we are comfortable with. The customer is the one who will tell us ‘this is how I want to replace the excess money’.”
The Banking (Amendment) Act 2016 signed into law by President Kenyatta on August 24 and gazetted on August 31, has capped interest the banks charge on loans at four percentage points above the base rate set by the Central Bank of Kenya.
The amended law has also raised interest on term deposits to at least 70 per cent of the base rate, loosely translating to 7.35 per cent considering the 10.5 per cent Central Bank Rate the presumed base rate.
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