May 24, 2024

CBK Moves to Regulate Hire Purchase Interest Rates

CBK Moves to Regulate Hire Purchase Interest Rates

Kenyans purchasing goods on credit through hire purchase agreements can expect a significant change as the Central Bank of Kenya (CBK) prepares to regulate interest rates charged in these deals. This development stems from proposed amendments to the Movable Property Security Rights Act. If enacted, these changes would represent a major expansion of the CBK’s regulatory authority.

Currently, the CBK oversees banks, microfinance institutions, and digital lenders. The new legislation would bring the entire hire purchase industry under the CBK’s umbrella, effectively repealing the outdated Hire Purchase Act.

The government aims to modernize the hire purchase sector, ensuring it operates with greater transparency and fairness. It also seeks to address concerns regarding potentially exploitative lending practices.

A recent Parliamentary inquiry highlighted troubling issues within the “buy-now, pay-later” model offered by many asset finance institutions. The inquiry unearthed evidence of hidden fees, exorbitant interest rates, and unfair penalties, raising concerns about the financial well-being of vulnerable consumers, particularly young and low-income Kenyans.

In January, the Digital Financial Services Association of Kenya (DFSA) itself acknowledged the problem, with chairman Kevin Mutiso condemning the practice of charging extra-collateral fees, terming it “criminal.”

Bodaboda operators, who rely heavily on motorbikes for their livelihoods, have been identified as a group particularly susceptible to such predatory practices.

A case was cited where a person paid Sh211,200 over 18 months. This included M-Pesa transaction fees of Sh27 per transaction and a Sh12,000 deposit. Ultimately, the individual paid Sh237,456 for a motorbike valued in the market between Sh100,000 and Sh130,000.

In another instance, a bodaboda operator, whose motorcycle model typically costs between Sh110,000 and Sh130,000 depending on the retailer’s location, ended up paying a total of Sh245,000 upon completing payments through hire purchase.

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The Business Registration Service (BRS) will retain authority over licensing higher purchase businesses, with ongoing issuance of permits and enforcement of necessary conditions expected. However, the National Treasury Cabinet Secretary will be empowered to establish regulations regarding the licensing of hire purchase businesses.

Presently, BRS oversees the licensing and supervision of hire purchase businesses through its higher purchase registry, which is connected to the movable property security rights registry.

The Movable Property Security Rights Act (MPSRA), enacted in 2017, is a significant piece of legislation that revolutionized how movable property (assets) are used as collateral for securing loans in Kenya. Prior to the MPSRA, obtaining a loan often relied on land as collateral, which many individuals and businesses, especially SMEs, lacked.

The MPSRA changed this by allowing movable assets like vehicles, machinery, or inventory to be used as security. This expanded access to credit, particularly for those who may not have qualified for traditional loans in the past. For borrowers, the registry protects them from unfair practices. The clear procedures outlined in the MPSRA ensure that creditors enforce their security interests according to the law.