Who protects consumers of financial services?


Published on 08/06/2009

By Jackson Okoth

Mr James Ogot received an urgent call from his younger brother.

His mother had been admitted in hospital and Sh5,000 was required for urgent laboratory tests.

Ogot decided to use a mobile money transfer service to send the money. After giving the cash to an agent, the mobile network collapsed, locking his cash in the system.

When signing loan agreements, some borrowers have no clue of some clauses in the contract that increase the cost of the debt.

Ogot underwent the agony of waiting for the system to be rectified as his mother’s life hang in the balance.

This incident is an example of numerous unpleasant experiences that haunt users of financial services, whose consumer rights are trampled on by service providers.

“When the technology networks malfunction, customers are disappointed and in distress. At times, no alternative channels of serving such customers in available,” Mr Cassian Nyanjwa, assistant director, banking supervision department at Central Bank of Kenya (CBK), told a mobile banking seminar recently.

Apart from the stock market, electronic money transfer services and insurance, consumers are also vulnerable when it comes to banking transactions.

Unfair practices in the banking sector include false advertisements, deceptions about the total price of a loan or credit as well as non-disclosure of rights and obligations of the customer.

There is a case pending in court in which a customer with a leading commercial bank lost his credit card. Although the customer reported the matter to the bank and followed all procedures to the letter, the bank failed to block the credit card in time, allowing its unauthorised use.

Subsequently, the cardholder was charged interest on the debt, although he did not use the card.

“We are still trying to assist this person through the lengthy litigation process in court,” says Mr Chief Nyamweya, an officer with Consumers of Financial Services Association (COFSA).

COFSA is lobbying to reverse a recent court revocation of the legal maximum that commercial banks can charge as interest, saying that Section 39 (A) of the Banking Act should be brought back.

non-performing loans

Although the Ministry of Finance and CBK have introduced the ‘In Duplum Rule’, which limits fees and penalties on non-performing loans to the amount of the outstanding principal, some outstanding issues remain.

“We want Parliament to extend the new rule to apply to non-performing loans, taken before May 1, 2007,” says Nyamweya.

COFSA officials say while the law requires that commercial banks give notice to the Finance minister before any levies on financial products, consumers are not aware of this provision and banks could be levying illegal charges on their products.

Other unfair practices in banking services include undue influence on consumers to enter a transaction as well as imposing an excessive charge on a financial transaction by not revealing the total cost of a financial service or product.

Take advantage

“Commercial banks also take advantage of ignorance and illiteracy of a consumer to enter a transaction,” says Nyanjwa.

COFSA is accusing CBK for leaving Parliament and courts to regulate the banking industry.

For instance, despite enactment of section 44 (A) which introduced the In Duplum law, today, not one single bank or financial institution regulated by the CBK is in compliance with this law.

Although various laws exist to protect consumers of financial services, the CBK is reluctant to enforce them due to pressure from the powerful lobby Kenya Bankers Association.

paying interest

The Banking Act section 16 (A) imposes restrictions on imposition of charges and requirement to pay interest on savings and deposit accounts.

But to circumvent this provision, banks have introduced transaction accounts to avoid paying interest on the said accounts.

Experts agree that having a comprehensive consumer protection law for the financial sector is a challenge, given that it will have to cover a wide range of financial services.

Currently, no single piece of legislation dealing with consumer protection exists.

“This is not a problem unique to Kenya. What we need is a substantive statute that deals with the litigation process, which does not require a lengthy court process,” says Nyamweya.

The proposed Consumer Protection Bill lapsed with the Ninth Parliament and is yet to come up for discussion on the floor of the House.

In the absence of adequate laws to protect consumers of financial services, borrowers — individuals and enterprises – have been brutalised by auctioneers pursuing payment of debts that have accrued interest and other penalities.

There is no statutory organisation, no banking ombudsman, no lobby or interest group (other than COFSA) that protects the interests of consumers of banking services

While banks and financial institutions have their interests protected and promoted by the Kenya Bankers Association, consumers of financial services have only Parliament to turn to.

Intense lobbying is underway to enact a comprehensive consumer protection law to cater for consumers of financial services. But the Consumer Protection Bill of 2007 is yet to pass through Parliament.

credit agreements

The Bill has several articles designed specifically for the financial sector and credit agreements.

For instance, borrowers are entitled to be presented with a disclosure statement every 12 months after entering the agreement.

The Bill requires a lender to issue a notice in case that payments are not sufficient to cover the agreement’s interest rate and that changes in the interest rate and the contract must have a 30-day notice.

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