FINANCE ACT, 2016 REVIEW SERIES – ISSUE 2

Monday, October 17, 2016
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The Finance Act No. 13 of 2016 (“FA”) was signed into law on 13 September 2016. The Act amends various Statutes including Consumer Protection Act (“CPA”) which is the focus of this update. The Consumer Protection Act was enacted to provide for the protection of the consumers by preventing unfair trade practices in consumer transactions. Since its enactment, there has been considerable debate about whether or not it should apply to ‘sophisticated’ consumers of goods and services such as banks, funds or large corporations which tend to have the requisite resources, knowledge and skills to negotiate favourable deals. However, in its current form, the CPA applies to all consumers without distinction. 

Commencement

Section 1 of the FA indicates when various sections of the FA will come into force. Section 86 of the FA, which amends the CPA, comes into force on 1st January 2017.

Application

The amendment brought about by section 86 of the FA only applies to bilateral and multilateral foreign  financial institutions such as the World Bank and the African Development Bank among others.   

Local Banks, microfinance institutions, savings and credit organisations, mobile money service providers and other lenders would therefore not be affected by this amendment.

Prepayment

Section 62 of the CPA provides that:

1. A borrower is entitled to pay the full outstanding balance under a credit agreement at any time without any prepayment charge or penalty.

2. If a borrower prepays the full outstanding balance under a credit agreement for fixed credit, the lender shall refund to the borrower or credit the borrower with the portion (determined in the relevant manner) of the amounts that were paid by the borrower under the agreement or added to the balance under the agreement and that form part of the cost of borrowing excluding interest.

3. A borrower is entitled to prepay a portion of the outstanding balance under a credit agreement for fixed credit on any scheduled date of the borrower’s required payments under the agreement or once in any month without any prepayment charge or penalty.
4. A borrower who makes a payment under 3 above is not entitled to the refund or credit described in no. 2.

Section 62 does not apply to a credit agreement where the National or the County Government is the principal borrower or guarantor or where the borrower is a public entity.

The FA has amended section 62 to state that from 1st January 2017, it shall also not apply where the lender is either a bilateral or multilateral foreign financial institution.

Effect

The effect of the amendment is that where a lender is a bilateral or multilateral foreign financial institution and the borrower is a Kenyan entity, the relevant credit agreement will govern the manner in which the loan will be prepaid-it can restrict prepayment all together or permit it subject to certain conditions being met.

Local or foreign lenders (who are not bilateral or multilateral financial institutions) are still prohibited under Kenyan law from restricting a borrower from prepaying a loan at any time by using deterrents such as charging an early prepayment fee or making early prepayment an event of default, to name a few.

Click here for issue 1 of the Finance Act 2016.