The 90% annual charges on Mshwari loans might be legal but not ethical

Mshwari loans

What’s your limit for Mshwari loans? Let’s assume it is 10,000. Now, for the next 12 months, I want you to be borrowing the Kshs 10,000 each month as you repay. Each month, you will be paying Kshs 750 on loan processing fees since Commercial Bank of Africa and Safaricom wouldn’t want to call the Kshs 750 charged on Mshwari loans as interest. By the end of the 12th month, you shall have paid CBA and Safaricom a total of Kshs 9000, which is 90% of the Kshs 10,000 borrowed amount.

CBA and Safaricom managed to maneuver the interest rate capping Act by referring to the 90% charges as loan processing fees despite the fact that it is pegged on a percentage rate rather than being a fixed amount. To appreciate the gravity of the issue, it is important to differentiate between interest on loans and bank charges. If you bank with any major banks, CBA included, you should be aware of how bank charges work. For example, those operating current accounts know that the accounts attract certain fixed amount of monthly charges for maintaining the account, mostly being Kshs 500, especially if the account maintains less than a certain minimum required for the charges not to apply. I&M Bank for instances charges Kshs 500 on corporate current accounts if the minimum balance is below Kshs 500,000.

The other times you probably meet bank charges are when you use ATM, mobile banking or over the counter withdrawals. Most banks charge between Kshs 20 and Kshs 50 for ATM and mobile money withdrawals, and somewhere between Kshs 100 and Kshs 200 for over the counter withdrawals. These fees are standard whether one withdraws the minimum or the maximum amounts that can be withdrawn. The common principle underlying these charges is that they are not pegged on any percentage rate of either the bank balance or the amount being withdrawn.

If CBA was therefore interested in charging some fees on Mshwari loans, they could have determined the fees on fixed amount basis not pegged on percentage of loan amount. For example, a fee of Kshs 200 or thereabout could have been the standard fee charged for loan processing, and this could have been the case whether the loan to be borrowed is Kshs 100 or Kshs 100,000.

But since Mshwari loans attract a percentage rate of 7.5% of the loan amount, the best way to define that rate is Interest. Cofek reasoned as much and decided to take CBA and CBK to court, arguing that the two institutions did not abide by the Banking Act 2016 which capped interests on loans to a maximum of 4% above CBK base rate. Cofek also accused the two institutions of misleading consumers that Mshwari did not attract any interests; that the 7.5% charges were mere loan processing fees. CBA and CBK on the other hand argued that consumers were not misled in any way, and that it is true 7.5% charges are nothing but loans processing fees.

In a judgment delivered by Justice Fred Ochieng and as reported by Business Daily, the High Court found that Cofek failed to prove that indeed M-Shwari charges an interest on its short-term loans. “In this case, the petitioner proceeded to give submissions on the basis of assumptions, rather than on the basis of proven facts. As the facts were disputed, it was shaky foundation upon which the petitioner made submissions,” said justice Ochieng.

I really do not know what facts Justice Fred Ochieng wanted Cofek to table, as things like bank charges, loan processing fees, and interests are industry standards that are worked out differently. I explained as much in an article I wrote even before the Banking Act 2016 came into effect. Wikipedia also has clear definitions and descriptions of both Interest on loans and fees levied by different institutions including the banks here and here.

Legal and banking terms aside, upholding the 90% loan charges on Mshwari is setting a very wrong example to other banking institutions that are already offering or intend to offer mobile money loans. Now, what would prevent someone like Equity Bank from revising their Eazzy Loans to reflect these outrageous charges in total disregard of interest rate capping Act? Actually the smart one like Barclays Bank has already taken into consideration this unethical behavior to incorporate a 5% loan processing fees (60% when calculated annually) into their newly launched Timiza Loans. In addition to the 5% loan processing fees,  the Barclays’ Timiza loans will also attract a 1.7% interest making the total charges amount to 6.7% per month on loan amount. That comes to 80.4% annual charges on the mobile loan.

What’s clear from the ruling by Justice Fred Ochieng is that the courts do not give consideration to the plight of ordinary Kenyans who rely on these loans, not for setting up and growing businesses, but mostly to put some food on the table. Even if the loans are being borrowed to set up and grow businesses, there are very few businesses that can generate twice as much as the interest (loan processing fees) that Mshwari and now Timiza is demanding.

I still believe that if the case was properly presented the judge could have required Mshwari to abide by the Banking Act 2016. It is therefore prudent for Cofek to appeal the ruling and if necessary go all the way to the Supreme Court as indeed the charges on Mshwari Loans and other mobile money loans are way too high.


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