Wednesday, January 24, 2007

Banking Amendment Act 2006.. aka how greedy banks will have to slow down

An amendment of the Banking Act passed by Parliament and and assented to recently. Some of the measures provided in the legislation include:

-Giving Central Bank of Kenya(CBK) more powers to regulate the Banking sector i.e. some of the powers vested in the Minister of Finance have been moved to the CBK. -CBK to vet new and existing owners and directors of Banks.It can even ask existing owners who dont pass the muster to reduce their holdings to below 5%.

-The charges banks can levy on Savings,fixed deposit and 7 day call accounts to be restricted.

-The in duplum rule, that restricts oustanding amounts on bad loans to not more than double the Principal to be effected.i.e. Interest stops accruing once it is equal to the Principal amount borrowed.

Dont celebrate yet because the rules only come into effect once the
Minister of Finance Gazettes them.

Look at this Letter of Intent and Memorandum from the IMF in 2004.Specifically item 22.You realise that we are merely implementing what IMF told us to do in 2004.

Click here for the IMF letter.

PS: I noticed that the IMF letter doesnt display when you go to the IMF site.
Type or Paste the following words " kenya+2004+letter+intent " in the IMF site search box, then click on the first search result item to get to the letter.

Picture of Fistful of Dollars courtesy of


coldtusker said...

Where can I get a copy of the Amendment?

Do we do to the IMF in all they say?
Should we do everything the IMF says?

The in-duplum is a BAD idea. Banks should be encouraged to lend long-term e.g. 15 yrs. So a modest 7% for 15 years = 105%

If Kenya Govt pays 12%+ for AAA T-Bonds, why would banks lend for any less considering the risks?

Banks will revert to loans for a MAX of 5 years (15% x 5 = 75%). To preserve their rights, they will immediately put a borrower in default instead of 'working out' the situation.

Why? The In-duplum rule prevents any sane banker from helping a lender extend the loan!!! There is no benefit to the Banker!

MainaT said...

The in duplum rule, is retrogressive, especially when you have the doublewhammy in Kenya of having issues with collateral and debt recovery being so difficult that we need specialist debt recovery companies.

pesa tu said...

@Everyone:The rule will not apply retrospectively.THAT IS OLD LOANS WONT BE AFFECTED BY THE RULE.

The in duplum rule only comes into effect once a loan goes bad not when its good(i.e. regularly serviced).
The rule doesnt limit the Interest chargeable on loans it only limits what can be recovered from you in case of default.
For example, if u borrow sh 1 milion at 20% interest per annum. The rule means that if u default the total amount recoverable from you(defaulter) is sh 2 million i.e. double the Principal loan of sh 1 million.

pesa tu said...

The Ammendment can be obtained from the Government printer at Haille Sellassie, just before Neno evangelism centre.Call them(number is in the phone directory)
Its a supplement to the Kenya Gazette published on 7th January 2007.

I dont know the price,mine was a complimentary copy.But shouldnt be more than sh 300

pesa tu said...

The other IMPORTANT thing is that the law is not yet operational.It will only come into effect once the Minister Gazettes it.

Probably to give CBK,Ministry of Finance to consult with the Banks.

This law will prevent situations where u borrow Sh 5 million from a bank, your biz collapses and the bank asks Sh 20 million from you.

MainaT said...

Pesa-tu, when i said retrogrossive, I meant its a backward way of dealing with the issue. Why? I have to confirm this, but I believe that you can't under the new IFRS accounting standards account for interest that you are unlikely to receive i.e.which would be the case with a loan gone bad.

coldtusker said...

Pesa - Bwana... if you have free scanning facilities... can you scan the amendment in?

The in-duplum rule provides leeway/incentive for a borrower to default.

How will banks mitigate their risk for long-term lending?

Example: A 20-year mortgage at 15% for KShs 10mn that goes 'bad' after 5 years. Assume that principal of 9mn is outstanding after 5 years.

The foreclosure is tied up in court for additional 10 years. Remember this is Kenya! These cases can be delayed almost indefinitely.

So the bank would have earned 9mn x 15% x 10 yrs = 13.5mn but can only recover 9mn+9mn = 18mn.

In the meantime, inflation has eaten away at the 'real' value of the interest income over the 10 years (Time Value of Money).

Furthermore, there are legal costs as well as personnel costs!

This means a sane, risk-averse banker would lend for a MAXIMUM of 5 years. Then the borrower has to jump through the mortgage/loan hoops AGAIN.

Or a Lender would ask for higher compensating balances (which wastes the Borrower's & Lender's resources ). To add insult to injury, Lenders will ask for high up-front fees to further mitigate their potential losses.

The genuine borrower will have to pay for others' mistakes/fraud.

pesa tu said...

Pole CT i;ve been busy.The Ammendment takes care of ur concerns.
Nope dont have scanning facilities

coldtusker said...


bankelele said...

You have uncovered the hidden side of foreign aid - and we have to do as the IMF says.

Changes were gazetted by the Minister in late January 2007

pesa tu said...

@CT: will elaborate further some other time
@Banks: Thanks didnt know