Lenders face penalties for hidden loan charges amid pushback on Treasury's role

The Central Bank of Kenya (CBK) is intensifying its crackdown on hidden charges in the pricing of loans with a landmark proposal that will, for the first time, compel mobile lenders to transparently outline all borrowing costs or face penalties.

This came as local lenders moved to court to lock out the National Treasury from having a say in how they price their loans.  

A newly released consultative paper details plans to overhaul the existing risk-based lending model and subject the rapidly expanding mobile loan sector to stringent new disclosure requirements.

The regulator's review of the Risk-Based Credit Pricing Model (RBCPM), introduced in 2019, revealed widespread inconsistencies and the imposition of opaque "other charges" by commercial banks, obscuring the true cost of credit.

On-site inspections indicated a divergence from the model's intended application, with lenders often applying discounts to initial inflated rates.

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A key focus of the proposed reforms is the elimination of these hidden fees, such as processing, negotiation, and commitment charges.

CBK is advocating for a revised framework where all lending-related expenses, shareholder returns, and borrower risk assessments are consolidated into a transparent premium added to a benchmark interest rate.

In a significant move targeting the burgeoning digital lending space, the CBK’s new regulations will mandate that mobile lenders clearly and comprehensively disclose all costs associated with their loans.

This marks the first time these lenders, often criticised for high and unclear fees, will be legally obligated to provide full transparency upfront.

Failure to comply with these disclosure requirements will result in penalties, the specifics of which are expected to be outlined following the consultation period.

CBK proposes its own Central Bank Rate (CBR) as the primary benchmark for loan pricing, rejecting a counter-proposal from the Kenya Bankers Association (KBA) for a base rate linked to interbank lending rates.

Under the CBK’s plan, banks and mobile lenders will add a premium – denoted as "K" – to the CBR. This premium will be subject to regulatory review and public disclosure of its components.

“This review aims to establish a credit pricing framework that is not only responsive to evolving risk and market dynamics but also fundamentally transparent and fair to borrowers across all lending platforms,” says CBK in its consultative document.

Meanwhile, the lenders are pushing back in a bid to have a free hand in the pricing of loans.

In their case filed before the High Court in Nairobi under the aegis of the Kenya Bankers Association (KBA), the 38 commercial banks and eight microfinance banks want Section 44 of the Banking Act declared unconstitutional.

The banking sector's lobby argues that the National Treasury Cabinet Secretary cannot determine the amount of interest charged on loans or even cap lending rates.

The lenders assert that the banking industry is regulated by the Central Bank of Kenya (CBK), which is autonomous from Treasury.

They asserted that they do not need the Cabinet Secretary’s prior approval to increase the interest charged on loans.

“This section, in effect, gives the Cabinet Secretary power to interfere with the formulation of monetary policy by restricting the increase in the rate of interest to be charged on loans. Article 231(3) of the Constitution sought to guard against this form of interference,” says KBA in court papers filed before Justice Peter Mulwa.

CBK was established in 1966. However, banks argue that CBK was granted powers to formulate and implement monetary policy on August 18, 1997.

The lenders argue in their case the current law is vague on monetary policy.

KBA’s lawyer, Lewis Ondieki, said banks are at a crossroads. They are required to lend to customers based on the CBR while simultaneously seeking the CS’s approval to increase interest rates.

He explained that CBK is required by the law to publish the lowest rate of interest it charges on loans to banks.

The court heard that the CBK’s Monetary Policy Committee (MPC) announces the CBR at least every two months.

According to him, when CBK wants to increase the amount of money available in an economy through a reverse purchase agreement (buying government securities from commercial banks), the CBR is the lowest acceptable rate.

On the flip side, whenever CBK wants to withdraw liquidity from the domestic market by lending to commercial banks using government securities as collateral, the CBR will be the highest rate that CBK will pay on any bid received.

“The changes to the CBR also have implications on both deposit and lending interest rates that commercial banks charge their customers. CBK, as the regulator of commercial banks in Kenya, requires commercial banks to change the rate of interest charged on loans to reflect the changes in the CBR,” argued Ondieki.

Under CBK's new regime, mobile lenders will, for the first time, be legally required to fully disclose all costs, ensuring consumers are fully aware of the financial implications before taking out a loan. Non-compliance will attract penalties.

CBK has initiated a public consultation period, inviting feedback from banks, mobile lenders, and the public until May 2, 2025.

The outcome of this process is anticipated to significantly reshape Kenya’s credit market, potentially curbing hidden fees and fostering greater transparency, particularly within the previously less regulated mobile lending sector.

The regulator’s assertive stance signals a determined effort to enhance consumer protection and market integrity by addressing long-standing concerns about the cost of credit and bringing all lending activities under a more transparent and accountable regulatory regime.