Regulatory Alerts2020-07-01
Added · Updated
Banking Circular No. 4 of 2016: The Banking (Amendment) Act, 2016
The Banking (Amendment) Act 2016, effective September 14, 2016, establishes the Central Bank Rate (CBR) as the base rate for loan interest calculations and mandates that interest rates on credit facilities be capped at four percentage points above the CBR. Financial institutions must submit monthly reporting returns to the Central Bank of Kenya within five working days of month-end, starting October 7, 2016, for the September period. Additionally, banks are required to provide the Central Bank with updated policies by September 30, 2016, ensuring full disclosure of all loan charges and terms to borrowers.
BANKING CIRCULAR NO. 4 OF 2016
TO ALL CHIEF EXECUTIVES OF COMMERCIAL BANKS AND MORTGAGE FINANCE COMPANIES
THE BANKING (AMENDMENT) ACT, 2016
Further to the notification from the Central Bank of Kenya (CBK), dated August 31, 2016, the Banking (Amendment) Act, 2016, will commence on September 14, 2016. With this in mind, CBK draws your attention to the following:
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For purposes of section 33B of this Act, the base rate is the Central Bank Rate (CBR). This is in line with Section 36(4) of the Central Bank of Kenya Act which requires that; "The Bank shall publish the lowest rate of interest it charges on loans to banks and microfinance banks, and that rate shall be known as the Central Bank Rate".
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For purposes of section 33B (1) (a) which sets the maximum interest rate chargeable for a credit facility "at no more than four percent, the base rate set and published by the CBK", the cap will be set at four percentage points above the CBR.
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The interest rates indicated in the Banking (Amendment) Act, 2016, will apply on an annual basis.
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For monitoring purposes, institutions should complete and return the attached documents to CBK within 5 working days after the end of the month. Accordingly, the first returns for end September 2016, should be submitted to CBK by October 7, 2016.
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Section 31A on the disclosure on loans states that "A bank or financial institution shall, before granting a loan to a borrower disclose all the charges and terms relating to the loan." Accordingly, institutions should submit to the CBK by September 30, 2016, copies of their policies that will ensure full disclosure of all charges and terms for loans to borrowers.
As you are aware, further reforms are needed to improve the operations of the credit market. In this regard, the CBK will put in place additional measures to enhance cost of credit, disclosures, strengthen the credit information sharing mechanism and improve interbank liquidity management. These reforms will also enhance the transmission of monetary policy.