Significance of the 2004/2005 Budget on the Banking Sector in Kenya
...egate, no more than 25% of its core capital to any one of its “significant shareholders” (and all his associates). This charge will place a significant administrative burden on institutions. They will now be required to keep track of major individual shareholders (including those who hold indirect beneficial interests through multiple investment vehicles) – as well as parties to whom those shareholders are related (e.g. where the shareholder has an interest as an agent, director, manager or shareholder). This will be complex and time consuming in practice. PROMOTING AFFORDABILITY The Minister announced a package of measures aimed at improving affordability of bank services. These included: × Establishing a Monetary Policy Advisory Committee × Enabling CBK to implement a base-lending rate through a neutral instrument to act as a signal to steer bank lending rates × Capping the amount of interest banks can recover from loan defaulters – the in duplum rule. The draft bill attempts to remove the uncertainty caused by the Central Bank (Amendment) Act 2000. This Act sought to cap the lending and savings interest rates that banks could apply – but was subject to legal challenge. The offending sections have been removed – and the Minister proposes to implement the in duplum rule in their stead. The proposals on the Monetary Policy Committee and base lending rates are long overdue. The 2000 Amendment also proposed establishment of a Monetary Policy Committee – the current proposals are less prescriptive as to the composition of the committee and give the committee less independence to manage its affairs. The monetary policy for the fiscal year 2004/05 Budget requires the Central Bank to implement a monetary programme that allows money supply to grow by 8%. This policy is predicated in underlying inflation being no more than 3.5% per annum. The Minister also proposed to amend Section 44 of the Banking Act, which allows the Minister to approve all increases in bank charges, but not to look into past or new charges. Bank charges currently in force will be deemed to be approved (although this will not affect cases already in court where customers are challenging banks’ rights to apply such charges). In his speech, the Minister stated that he would amend the section to enable him to deal with bank charges more comprehensively, both the existing and the introduction of new charges. The amendment will also give the Minister power to determine whether past charges are appropriate. However, interest and other banking charges will continue to be determined by market forces – banks will just be required to communicate changes in any charges to their customers before effecting them. This appears to leave bank charges effectively unregulated. In duplum – The Minister announced changes to the Banking Act to cap the amount that banks can recover from defaulters. Banks will be allowed to collect only: i. The principal sum outstanding on the date when the borrower last missed a scheduled payment; plus ii. Interest (capped at an amount equivalent to that principal amount); plus iii. Costs of recovery. This applies to all loans made after the section becomes effective. Existing loans also fall into the net. However, for these, the cap on interest is set at twice the total amount outstanding on the loan (principal and interest) outstanding on the date the rule comes into effect. But the cap will come into play within 4 to 5 years – particularly for the consumer loans that the banks are now targeting aggressively. For example, a bank that lends KShs 1 million at a rate of 15% per annum and the borrower does not make the first scheduled payment on the day it is due – will be limited to collecting a maximum of KShs 2 million from the borrower. The bank will only be out of pocket (and the borrower given some relief) if the borrower does not make full repayment within four years. Hence, for the next few years, this rule is likely to have only a limited direct financial impact on banks and their borrowers. For existing large non-performing loans – banks can only hope to recover, at most, the forced sales proceeds of the collateral they hold. Banks are likely to begin taking action against defaulting borrowers much earlier as they seek to wrap up recovery processes within the four-year window. However, the rules will impose significant additional record-keeping burdens on banks. In particular, identifying and keeping track of the latest dates on which a loan becomes non-performing will be complex in the (common) circumstances where borrowers make sporadic lump-sum repayments. Banks will have to develop detailed rules and adapt their systems to allocate payments they receive between interest and principal. It is noteworthy that the cap on recoveries from defaulters, as proposed, will only apply to institutions registered under the Banking Act, leaving other lenders such as micro-finance institutions, co-operatives and insurance companies unrestricted in the amounts they can recover. IMPROVING EFFICIENCY The Minister noted that Kenyan banks were inefficient by international standards. He announced a range of measures to improve their efficiency including: × Improving the efficiency of the payments system by introducing a Cheque Truncation System × Formulating a National Payments System and an Electronic Funds Transfer Policy × Promises to gazette regulations for information sharing amongst institutions to reduce the bad debt risk currently experienced due to lack of information. The industry should welcome these changes if they lead to measurable reductions in time and costs. These changes are necessary to enable banks keep up with cutting-edge practices and subsequently realize improved operational efficiency in the payment system, which reduces the clearing period for cheques. Banks are adopting a wait and see attitude on the above promises made with regard to improving efficiency. PROMOTING ACCESS The Minister re-iterated the importance o...