Interest on mortgage loans could drop below 10 per cent if recommendations by a parliamentary select committee investigating the fall of the shilling are adopted even as banks warned that it would limit credit supply.
The House committee recommends amendment of Section 44A of the Banking Act so as to limit the total interest charged on a loans not to exceed the amount borrowed.
If adopted the amendment would force banks to lower the rates on their long tenure loans mainly mortgages.
“Section 44A of the Banking Act needs to be enforced and further amended to apply to all loans – both performing and non-performing,” reads the report.
The House Business Committee will decide on Tuesday whether to slot the report for debate and consequent adoption this week or to have it wait until Parliament concludes the Bills on devaluation and land, which saw it recalled early.
Mortgages with a life of 20 years will have their rates capped at eight per cent, which is lower than the 20-year Treasury bond yields of about 13.8 per cent.
Currently, mortgages are attracting 24 per cent meaning that a person taking a Sh5 million loan for 20 years would pay a total of Sh24.2 million exclusive of processing fees. The interest component being Sh19.2 million is nearly four times the principal.
Borrowers, who are currently servicing mortgage loans, will be a relieved lot if the report is adopted in its totality as the committee asks for a backdating of the rule.
“This section shall apply with respect to loans made before this section comes into operation,” the report reads.
The amendment would see the terms “with respect to a non-performing loan” as it is in the Act dropped and replaced with “with respect to a loan”.
Currently, the Act stops banks from charging interest on a loan, which is not being serviced so as to ensure the accrued interest does not exceed the amount that was outstanding when the borrower stopped making payments.
A survey conducted in December by the Kenya Bankers Association showed that 1,273 loans totaling Sh879.4 million did not attract interest during the month under the in-duplum rule.
Bankers opposed the recommendations stating that, owing to their long tenure, mortgages were bound to be expensive as they attracted a higher risk premium and implementation of the report would see them shy from the long-term loans.
“This would misinterpret the in-duplum rule, which is meant for customers who are having trouble in repayments.
The report has not been adopted yet so we cannot talk of taking any action,” said Mr Habil Olaka, CEO of Kenya Bankers Association.
Banks noted that they would not be willing to offer long-term loans as the returns would not be attractive.
“This is ill advised as it will limit credit to short-term loans whose interest will be within the bracket.
We will, however, have to see how this transpires,” said a credit manager with a home loan lender who did not wish to antagonize MP’s.
Kenya’s mortgage market is considered to be small by international standards with only 15,049 loans valued at Sh61 billion lent out by mid 2010.
Adoption of the report would see the monthly installments of a Sh5 million loan drop to Sh41,822 making it affordable to salaried middle class in observance of the “a third rule” while applying for loans.
The proposal is said to fall outside the committee’s mandate, which was to probe the depreciation of the shilling last year.
To support the shilling, Central Bank took measures that saw commercial banks raise their lending rates eliciting harsh reactions from MP’s and the public. Mortgage rates rose from a market average of 15 per cent to the current 24 per cent within an year.
The report is likely to cause a stir in Parliament where the MP’s have been seeking to introduce a clause in the finance Bill regulating interest rates charged by banks by capping them at four percentage points above the Central Bank Rate.