The Central Bank of Kenya (CBK) and commercial banks are in discussions to overhaul the Banking Act. The proposed changes aim to resolve a long-standing dispute over who has the authority to approve changes in lending rates. The Kenya Bankers Association (KBA) is leading the push for reforms. The goal is to have the CBK as the sole entity responsible for approving variations to loan pricing by commercial banks.
Section 44 of the Banking Act currently requires financial institutions to obtain approvals from the Treasury Cabinet Secretary before altering loan rates. However, in practice, banks have been raising or lowering their lending rates under the supervision of the CBK. This has led to numerous court disputes and uncertainty. Many borrowers have obtained court judgments faulting banks for not obtaining prior approval from the Treasury Cabinet Secretary.
The dispute over loan pricing adjustments has been ongoing for decades. In 2006, the then Finance minister Amos Kimunya delegated powers over interest rate variation to the CBK Governor. Since then, the Treasury has taken a backseat on setting interest rates. However, lawsuits brought by borrowers against banks have continued to challenge the industry.
The Supreme Court recently ruled that interest rates on loan facilities advanced by banks are subject to regulation under Section 44 of the Banking Act. This requires prior approval from the Treasury Cabinet Secretary. The judgment sparked fears of a surge in lawsuits against lenders over loan pricing variations. The KBA has since moved to challenge the ruling.
The KBA argues that Section 44 of the Banking Act violates constitutional provisions safeguarding the CBK's independence in monetary policy formulation. The lobby believes that interest-rate adjustments are a key instrument of monetary policy and should not require Treasury approval. The High Court previously rejected a similar petition from the KBA.
In August, banks obtained temporary relief when the clause was suspended pending the determination of the KBA's challenge at the Court of Appeal. The CBK has largely stayed out of the disputes but has expressed differing views with the Supreme Court judgment. CBK Governor Kamau Thugge recently told bankers that monetary policy decisions are independent and should be implemented directly by banks.
Proposed reforms being considered in the overhaul of the Banking Act include the creation of a sector tribunal to handle customer disputes. This would provide a forum for customers to resolve issues with banks quickly. The tribunal aims to reduce the number of cases that end up in court, which can take years to resolve.
Key points
- The Central Bank of Kenya and commercial banks are in talks to review the Banking Act to resolve a dispute over who approves changes in lending rates.
- The proposed changes aim to have the CBK as the sole entity responsible for approving variations to loan pricing by commercial banks.
- The overhaul of the Banking Act may include the creation of a sector tribunal to handle customer disputes.
