Central Bank of Kenya sets stage for cheaper bank loans

Borrowers are set to enjoy cheaper loans after the Central Bank of Kenya released a new indicative rate on which commercial banks will base the cost of credit.

In its meeting on Tuesday, the Monetary Policy Committee set 9.13 per cent as the rate on which banks will set interest rates for loans to their customers over the next six months. The rate will be reviewed in January next year.

The move is the culmination of efforts by the government to see the cost of credit drop to a rate affordable by the majority of consumers as part of its efforts to stimulate economic growth.

The establishment of the Kenya Bankers’ Reference Rate (KBRR), based on which banks would price loans, was one of the recommendations of a committee formed by Treasury Cabinet Secretary Henry Rotich to find ways of cutting interest rates which have made borrowing for investment harder.

“This level of the KBRR will be effective from 8th July, 2014, until its next review in January 2015 if conditions do not drastically change,” CBK said in a statement.

CBK’s announcement is expected to trigger a significant drop in the current interest regime that has been blamed for curtailing economic development at the expense of huge profits for banks, which have recorded significant growth in earnings in the last 10 years.

ALLOWED TO PUT PREMIUM

All new flexible loans issued after July 1, 2014 will be priced using the KBBR framework while a transition period of one year from July 1, 2014 will be provided to allow banks to recalculate existing loans.

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

The current average lending rates by banks is 16.97 per cent and there have been concerns from multiple quarters that the rate is unjustifiably high.

KBRR is an average of the central bank rate —which has been maintained at 8.5 per cent — and the average 91-day Treasury Bill rate for the previous six months.

It was developed as part of the recommendations by the National Treasury to enhance the supply of private sector credit and mortgage finance by facilitating a transparent credit pricing system.

The Treasury said that the new framework would be replicated for other regulated lenders including microfinance banks.

The development is part of a bigger strategy to streamline the whole financial services sector with a view to increasing availability of credit to the private sector as the country eyes a middle income status by 2030.

Lenders are, as part of the measures, required to implement a different loan pricing formula to eliminate all hidden charges.

Beginning July 1, banks were required to use the annual percentage rate (APR) - the indicative price of a loan inclusive of non-interest charges.

APR captures the one-off loan processing fee, insurance cost, security charging expenses and the actual interest charged on a loan facility.

Traditionally, CBK has only required banks to provide loan applicants with a breakdown of the total cost of credit that include bank charges and third-party costs as well as the repayment schedule.

The APR mechanism was long overdue, according to analysts.

“It is in line with the Consumer Protection Act which requires that consumers should be aware of the cost of the products and services they buy,” said Mr Johnson Nderi, the corporate finance and advisory manager at ABC Capital.