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The implications of the Finance Bill of 2018 to the Banking Sector of Kenya.

Eric Onyancha

The Finance Bill 2018 (hereafter ‘the Bill’) which was published following the reading of the Kenya’s Budget of the year 2018/2019 intends to repeal various Acts in order to finance the upcoming budgetary provisions for the financial year 2018/2019. Once the Finance Bill 2018 comes into law in its current form, the following Acts will be repealed: The Income Tax Act, Value Added Tax Act of 2013, Excise Duty Act, Tax Procedures Act, Miscellaneous Fees and Levies Act, Tax Appeal Tribunal Act, Betting, Lotteries and Gaming Act, Marine Insurance Act, Air Passenger Service Charge Act and the Banking Act.

Amongst the notable and expected implications of the passing of the Bill is the anticipated repeal of Section 33B of the Banking Act. This development will dispossess the Central Bank of Kenya, the regulator of the Banking Sector of Kenya, of the power to set caps on interest rates on loans advanced to Banks’ customers and the interest earned on fixed deposits. Section 33B(1)(a) of the Banking Act which touches on interest rates on loans in its current form states that:

“A bank or a financial institution shall set — the maximum interest rate chargeable for a credit facility in Kenya at no more than four per cent, the base rate set and published by the Central Bank of Kenya.”

This base rate is known as the Central Bank of Kenya (CBK) rate and is set periodically, as per current
legislation, by the Monetary Policy Committee (MPC). The CBK rate determines the maximum interest rate set by Banks on existing and new loans. The latest CBK rate is 9.5 points (May 2018) with the maximum interest rates chargeable by Banks being 13.5 % per annum. The expected repeal of Section 33B of the Banking Act would result in the renegotiation of all contracts between Banks and their existing customers by operation of the Law. Banks will therefore have hold of the reigns to determine the applicable rates to current loans on the Banks’ books as well as new loans. Section 58 of the Bill thus effectively scrapes Section 33B of the Banking Act.

It is also anticipated that the Kenya Bankers Association (KBA) will release its own rate known as the Kenya Bankers Reference Rate (KBBR). The last KBBR (9.87%) was released in July 2016 prior to the Banking (Amendment) Act of 2016. This KBBR was ultimately revised downwards by the CBK to 8.9 %. Banks are generally encouraged to adhere to the KBBR. Nevertheless, since the KBRR is not anchored in statute, Banks will be free to increase the charged interest rate based on various factors which include but are not limited to the creditworthiness of a customer. The National Treasury expects the repeal of Section 33B of the Banking Act to increase Banks’ profitability, credit uptake and more lending by Banks which are expected to move away from their investments in Government Bonds and Treasury Bills (T-Bills).

The only refuge for new and existing Borrowers upon the repeal of Section 33B of the Banking Act will be section 44A of the Banking Act which effectively “freezes” accrued interest on non-performing loans when the interest equals the principal amount advanced. The CBK will therefore have no say on the amount of interest that can be charged on loans and amounts advanced to Banks’ customers leaving the responsibility of negotiating interest rates solely between the customers and their Banks. Therefore, existing Banks’ customers and potential customers should brace for higher interest rates for the years 2018/2019. By operation of the law (should the Finance Bill 2018 be passed), all existing contractual interest rates and potential contractual interest rates will be renegotiated between the Banks and the existing customers and potential customers rather than chargeable interest being dictated by statute.

The opinions expressed above are for educational purposes only and the author or law firm in which the author was attached during the period in which the opinions were rendered are insulated from any liability for the use or dissemination of the above opinion. The opinions are the author’s own and should be taken at face value as is. For proper legal advice and assistance, kindly visit the offices of MJD Associates Advocates at Empress Plaza, 1 st Floor, Ring Road Westlands, Nairobi.