Treasury in bold move to make credit accessible and cheaper

Beginning July, banks will be required to use a new loan pricing formula aimed at making credit cheaper and more accessible to the public.

The new requirement is part of a raft of recommendations released yesterday following a government-led study on high interest rates in Kenya.

“One of the key barriers to the growth of credit in Kenya has been cited as the relatively high cost of accessing credit for both individuals and business enterprises,” a statement issued by the National Treasury Cabinet Secretary Henry Rotich read.

One of the key recommendations, the team established by National Treasury says, all lenders must subscribe to the new formula to be called Kenya Banks Reference Rate, cutting opportunities for banks to add hidden charges on loans.

“All new flexible loans issued after July 1, 2014 will be priced using the new KBBR framework while transition period of one year from July 1, 2014 will be provided to allow banks to recalculate existing loans in line with the new framework and inform the borrowers,” the statement further read.

REGULATED LENDERS

Banks will, however, be allowed to put a premium on the standard government rate, to be recalculated every six months, to reflect individual borrower’s risk profile.

“The framework will be extended to other regulated lenders including microfinance banks,” said the committee in its recommendation.

The formula is part of 12 other recommendations presented to Deputy President William Ruto by the committee aimed at arresting the high cost of credit.

Lenders have for long been accused of putting their profits ahead of public interest and economic expansion through high interest rates.

However, in February Kenya Bankers Association blamed Treasury for same arguing that inefficiencies in land registries and the Judiciary increases the cost of money.

Analysing CBK data in a report last year, the World Bank noted that profit was the largest contributor to interest rate spreads – difference between interest on loans and interest earned on deposits.

RECOMMENDATIONS

Other findings by committee

Implement Treasury Mobile Direct system to enable retail investors directly participate in government securities to enhance competition for deposits.

Fast-track capital markets reforms to make money markets more efficient and an attractive alternative source of long term funds.

Fast-track establishment of proposed Kenya Development Bank from existing development finance institutions as an alternative source of financing.

Facilitate lines of credit for large housing development projects targeted at lower income buyers for owner-occupation.

Both National and County governments to explore availability of land for development of affordable housing projects by private developers.

Ensure government borrowing does not crowd out private investors through adopting alternative source of credit.