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Depositors face low yields after Kenyan MPs vote to change law

NAIROBI (Xinhua) -- Kenyans saving money in banks are set to lose earnings on their deposits after MPs removed legal control on savings rate.

The legislators on Thursday voted to remove a requirement that banks pay at least 70 percent of the Central Bank of Kenya (CBK) base rate on deposits.

The MPs also retained interest rates caps at 4 percent above the apex bank rate, which currently stands at 9 percent.

The retaining of the rate caps was against the central bank and National Treasury’s wish to do away with the ceilings.

The law on deposit earnings introduced last year together with the ceiling on lending charges assured depositors a minimum saving rate of 6.3 percent.

The removal means, therefore, that banks are free to offer or not offer customers interest rates on their savings.

The worst to be affected would be small savers, who cannot negotiate with banks on interest rates to be offered on their deposits because of the little savings.

Huge depositors may, however, not feel any pinch as they are in a position to negotiate with banks on earnings.

Henry Wandera, an economics lecturer in Nairobi, noted that removal of the ceiling on interest rates paid on deposits exposes savers.

"What this means is that customers would have no legal banking to ask for earnings on their deposits. They would be at the mercy of banks who may give them if and when they want," he said.

However, he noted that there may be a silver lining on the situation if President Uhuru Kenyatta assents to the changes contained the Finance Bill 2018 once it leaves Parliament.

According to Wandera, the situation may lead to stiff competition among banks in race for customer deposits, with the institutions offering good rates to entice borrowers.

"What this may mean is that banks may come up with savings accounts that have good interest income to lure depositors to their side.

"This would stir up the market and intensify competition," he said.

Industry data shows that commercial banks before the changes have been offering depositors an average of 7 percent.

But only those saving money for long-term have been earning interest, with banks changing the rest of the accounts to transactional from savings.

The move has seen them spend less on interest expenses on customer deposits as indicated in their earnings.

In 2017, banks’ interest expense on customer deposits went down by over 50 million U.S. dollars from 1.11 billion dollars to 1.06 billion dollars.

This is despite customer deposits growing by 3 billion dollars to 29 billion dollars from 26 billion dollars, according to the Central Bank.

And in their half-year earnings, big banks similarly spend less on interest expenses on deposits.

Mortgagers are among those who have crossed their fingers hoping that Kenyatta signs the bill into law so that the capping on lending charges remain in force.

"I am not ready to pay 18 percent or more on my 13-year mortgage as was the case before.

"The last two years has come with relief because of the rate caps," said Joseph Mutua, an employee of a government agency.



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