Apparently defying expectations of the experts (i.e. the banking industry, economists, the Central Bank of Kenya (CBK) and the Treasury) all of whom poured scorn on the proposed intervention while acknowledging there was a problem that needed to be addressed, the President not only assented to the Banking (Amendment) Act, 2016 (the Act) but also assured the public of the Government’s commitment saying, “ We will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms. We will closely monitor these difficulties, particularly as they relate to the most vulnerable segments of our population. Whilst doing so, my Government will also accelerate other reform measures necessary to reduce the cost of credit and thereby create the opportunities that will move our economy to greater prosperity.”
While debate will continue to rage on over the propriety of the interest rate caps introduced by this legislation and the further identified reforms promised by the President, of immediate interest is what compliance with the law entails - what exactly would fulfilling the legislation’s object of regulating interest rates by capping interest charged on loans by banks and financial institutions and fixing the minimum rate to be paid on deposits require?
A recap of the legislation:
- A section has been introduced that requires prior disclosure to a borrower of all charges and terms relating to the loan - codifying what has now become standard practice.
- On the pain of criminal sanction, there is now a ceiling interest rate on loans and a floor on interest payable on deposits, both relative to CBK’s base rate:
a) The maximum rate on interest on a “credit facility” (a term not defined) should not exceed 4% of that base rate and b) The minimum rate of interest on deposits should not go below 70%.
Commencement
Rather unusually the Act is silent as to when it is to come into force. This is not a problem though, as by dint of Article 116(1) and 116(2) of the Constitution of Kenya, the Act shall be published in Gazette as an Act of Parliament within seven (7) days of receiving Presidential assent and will thereafter come into force within fourteen (14) days of its publication unless the Act stipulates a different date or time on which it comes into force.
Scope of the Act
As previously noted above, the term “credit facility” is not defined. However, the credit facilities to which the amendments apply are those provided by banks or financial institutions. Banks and financial institutions as defined under the Banking Act (Cap. 488) are restricted to institutions which carry out banking or financial services and are licensed by the CBK under the Banking Act. It follows that those institutions which are licensed and/or operate under different statutory regimes such as say microfinance institutions - see the Microfinance Act (Cap. 493D), will not be caught by the Act.
If, however the institution is a bank or a financial institution, then all its lending will come within the ambit of the amendment e.g. credit cards, hire purchase etc.
Retrospectivity
One of the more puzzling aspects of the legislation is whether or not it potentially has any retrospective effect i.e. does it affect arrangements or agreements reached prior to its enactment? It seems plain that the newly introduced Section 31A, requiring prior disclosure of all charges and terms of a loan relates to the future.
Perhaps not so clear are the interest rate cap provisions - Section 33B. Sub-section 33B(1) - which cut the swathe rather widely and may potentially have a retrospective effect in that banks and financial institutions are required when the Act comes into operation to set their interest rates in accordance with these sections, but this might be consistent with subsequent sections. Sub-section 33B(2) - states that, “a person shall not enter into an agreement or arrangement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law,” while Sub-section 33B(3) imposes criminal penalties on banks or financial institutions which violate Sub-section 33B(2).
The canon against non-retroactive laws is a fundamental aspect of the Rule of Law, giving effect to the principle that liability or culpability should only be imposed on the basis of public laws to which subjects had prior notice. In addition, there is an express prohibition against retroactive laws in Article 50(2)(n) of the Constitution of Kenya, thus a retrospective reading of Sections 33(B)(2) & (3) would render them unconstitutional.
The Supreme Court has also held in the civil context, that a retroactive law is not unconstitutional unless it, " (i) is in the nature of a bill of attainder; (ii) impairs the obligation under contracts; (iii) divests vested rights; or (iv) is constitutionally forbidden. It seems, that any reading of Section 33(B)(1) which gives it retroactive effect would fall afoul of the second and third of these rules."
Also, it is a tenet of constitutional interpretation to avoid reading a statute in a manner that would give rise to constitutional infirmity. Thus, Section 33B should be read as non-retrospective.
Subsidiary Legislation
It has been suggested that the new provisions cannot come into force until subsidiary legislation is promulgated by the CBK giving effect to them; there is no legal basis for this suggestion. While the Cabinet Secretary for Finance is indeed empowered to make regulation, there is nothing in the Act which requires such regulation for it to be operationalised.
It is still too early to make a call on the effect of the Act going forward. As we noted the Executive has committed itself towards its full implementation as well as to further financial sector reforms, to avoid any possible deleterious effects as well as to increase access to credit. While maintaining its reservations as to its wisdom, the CBK stated, “We continue to express concern on the adverse consequences of capping interest rates. These would include, inefficiencies in the credit market, credit rationing, promotion of informal lending channels, and undermining the effectiveness of monetary policy transmission,” however it has also been steadfast that reforms are required to increase access to credit at an affordable cost.