Banking and Finance Laws

Hey legal minds,

I only can imagine how we all feel like lawyers already after the consistent weekly post on commercial law.Well, as promised we shall be talking about the banking and finance laws.But just before we start the conversation allow me to shed some more light on the differences between a bill, an Act, and a law.

bill is a proposed law under consideration by a legislature. A bill does not become law until it is passed by the legislature and, in most cases, approved by the executive. Once a bill has been enacted into law, it is called an Act or a statute.

Now, Banking and finance-related legal issues can affect anyone. Individuals may have their bank accounts compromised by financial institutions that fail to follow Central Bank of Kenya (CBK) regulations, small businesses can run into collateral issues when accepting investment funds and finally, large corporations and banks have business regulations they must follow.

Therefore, banking and finance law addresses the organization, ownership, and operation of banks and depository institutions, mortgage banks, other providers of financial services regulated or licensed by the Central Bank of Kenya.

Without further ado, let’s talk about what you need to know about the banking and finance laws;

1.The Law provides that banks shall not charge more than 4 %–  the base rate set and published by the CBK  bringing the maximum interest chargeable on a credit facility to 14%.

The term “credit facilities” is not defined in the law and therefore the ordinary definition that any form of advancement of loans to clients including credit card services applies. The cap on interest rates introduced by the law could, therefore, apply to any facilities extended by banks regardless of the size or nature of the facility or the borrower.

This law came into force on 14 September 2016 causing a 23% decrease in average lending rates months later but, the regulator intervened by proposing a new bill that allows borrowers to use items such as machinery, furniture, vehicles among others as collateral in securing loans after the bill was signed into law.

This is aimed at widening the scope of business capital and investment funding by enhancing access to credit by micro, small and medium business owners who have been unable to provide fixed assets as security against credit facilities.

2.The law also provides for the establishment of the office of the Registrar of Security Rights, which will facilitate the registration of security rights in the movable property. This will provide a system that can be used by lenders, businesses and other practitioners in increasing secured transactions, access to credit and other forms of finance.

It is important to note that the interest rate only applies to the Kenyan Shilling currency. It is, therefore, unclear how loans and deposits in foreign currencies would be dealt with as they are not specifically excluded from the application of the Act. In addition, loans made by foreign lenders and other non-bank lenders are not caught by the Act.

3. The Amendment Act requires banks to disclose charges, terms, and conditions related to a loan to a borrower, before granting the loan, these provisions similar to the stipulations outlined in the Consumer Protection Act as discussed earlier in my previous post.

However, the Act does not address the variations of terms and conditions after the loan has been granted, but it’s expected that the CBK will in due course provide guidelines on the disclosures required.

The Banking Act applies to Kenya’s banks and financial institutions but excludes microfinance institutions, savings and credit organizations, and mobile money service providers, among others, from its application.

To ensure the service providers are streamlined the Act provides a penalty of a fine of not less than Ksh 1 million or imprisonment for a term of not less than 1 year (or both) for CEOs of banks that contravene the provisions of the Act.

4.In a country where Muslims account for about 10% of the population, the new Islamic finance regulation is key to our conversation.The Islamic Finance laws that facilitate the inclusion of various definitions and Sharia products include;

law The Stamp Duty, Act – The amendment intends to create tax neutrality against interest-based transactions, as the asset-based nature of Islamic finance contracts often means they can incur multiple tax charges.The changes as effective as of 1 January 2018. 

law The Public Finance Management Act – This amendment intends to create tax neutrality for Islamic financial bonds or sukuk, as an alternative funding source.This will enable them to favorably compete with other conventional bonds in the Kenyan market which was effective as of 1st July 2017.

law The Co-operative Societies Act – The Act seeks to address the lack of recognition of Islamic financing in the cooperative sub-sector of the Kenyan market effective as of 1 January 2018.

lawThe SACCO Societies Act –  The Act provides for defining “deposits” and “deposit taking SACCO business” to include the principles of Islamic law for recognition of Islamic SACCOs in Kenya effective as of 1 January 2018.

 

lawExemptions to value added tax will allow returns from Islamic deposits to be eligible for deductions similar to interest-based products. This would apply to individuals, corporates and government entities.

Implementation could be quick as most changes have already been drafted by the Islamic Finance Project Management Office (PMO), a body set up by the government to coordinate efforts among its regulatory agencies.

The new Islamic Finance Law will not only benefit us since they have 0% interest rate on loans but also aid the government in achieving financial inclusion and financial diversification targets.

It’s definitely clear that even the law is pushing the banking and financial sector out of its traditional systems despite the industry’s conservativeness.

An inclusive banking and finance law includes advice and representation not only with respect to lending and regulatory compliance, but also with respect to fiduciary activities, securit

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