Yesterday, the President signed the Banking (Amendment) Bill, 2015. It’s just under a year to the next election, and the president has surprised many by signing the bill.  He’s taken an ace from the opposition and, in a way, fulfilled his Jubilee party manifesto which has a line about “..pursue exchange rate stabilization policy and monetary policy that will lower interest rates.”

In signing the bill he noted that banks … need to do more to reduce the cost of credit and …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.

There’s a version of the bill  at the ICPAK site that mentions:

• The maximum interest rate is  4% (above the CBK base rate) for any credit facility in Kenya
• Deposit on an interest earning account will be 70% of the base rate
• Fines & jail terms for bank executives.
• Banks that flout other sections of the banking law, can’t pay out dividends or bonuses and can lose control to the regulator.

There is still a lot of ambiguity in terms of the reach of the law. Does it cover mortgages? What about micro-finance institutions (MFI’s), mobile banking loan products (M-shwari has 4 million customers and KCB M-pesa has almost 1 million borrowers) , credit cards (which have interest rates of 30%) and most important will the law be retroactive? i.e. apply to already existing loans

In the meantime, expect banks to overhaul all their products including:

• Limiting new loans.
• Reducing interest-earning accounts i.e savings account products
• Overhauling all products and marketing materials in terms of disclosures.
• Bank charges will go up, and maintaining bank accounts will get much more expensive.

Finally, a common lament in this current parliament has been a lack of implementation of its bills. And with interest rates, the president may have signed it, but the date on which they will become effective as a law is not clear.

The era of bank super profits is in the  past, and this new bill makes the banking sector, still unsettled by bank closures and increased regulatory scrutiny, much less attractive to potential investors.