Relief for borrowers as CBK cuts benchmark rate by 1pc

Central Bank of Kenya (CBK) Governor Patrick Njoroge. Borrowers should expect cheaper loans from August after the Central Bank of Kenya (CBK) cut the lending referencerate by nearly one per cent yesterday. (PHOTO: COURTESY)

Borrowers should expect cheaper loans from August after the Central Bank of Kenya (CBK) cut the lending referencerate by nearly one per cent yesterday.

The rate cut came after depressed loans appetite from the private sector since the start of the year, with commercial banks finding themselves stuck with huge cash amounts.

CBK Governor Patrick Njoroge last evening announced that the Kenya Bankers Reference Rate had been slashed to 8.9 per cent in the first step to cut lending rates, after a policy-driven hike last year.

Banks price loans using the reference rate as a base, plus an allowance that covers for risk and profit margin.

“In line with the framework, the CBK has revised the KBRR to 8.90 per cent from 9.87 per cent, effective from July 25, 2016,” Dr Njoroge said in a statement, after chairing a meeting of the Monetary Policy Committee.

His committee, however, agreed to retain the Central Bank Rate (CBR) at 10.5 per cent. CBR is the price that CBK levy on loans granted to commercial banks. Njoroge’s decision now requires commercial banks to inform their customers of the impeding rate cut which takes effect on August 24 – after the expiry of the 30-day notice.

Habil Olaka, the chief executive of the banks’ lobby, told The Standard that the rate cut take effect on the next loan repayment after the notice period.

“It is an automatic reduction for all loans priced on the floating rate,” Olaka said. Borrowers should expect the notifications from their respective banks beginning today. Banks are expected to slash their total lending rates, which are currently about 22 per cent, by at least one per cent.

Total interest savings on a Sh3 million loan repayable over five years at 21 per cent is over Sh100,000. Njoroge further resisted plans by the National Assembly to regulate lending rates, as a means to cushioning borrowers from greedy lenders.

While CBK believes that lending rates were too high and needed to be slashed voluntarily, legislating interest rates, it reckons, would be counterproductive.

“Measures to cap interest rates would lead to inefficiencies in the credit market, promote informal lending channels, and undermine the effectiveness of monetary policy transmission,” the MPC’s statement read.

It would be the first time in 12 months that the committee had reviewed the reference lending rate since July last year when it resolved to raise the KBRR from 8.54. At the time, the Kenyan currency was struggling with volatility shocks occasioned by strengthening of the US dollar.

In raising the reference rate, together with the Central Bank Rate to 11.5 per cent from 10 per cent, the regulator acted to discourage borrowing. Yesterday’s rate cut was not entirely unexpected, considering the slow uptake of loans by the private sector. Sunil Sanger, the managing director of Orion Advisory Services, had earlier in the day predicted a lower rate citing that failure to slash the reference rate would stall economic growth.

“(There is) little justification for MPC holding rates when indicators are way below policy targets. Without stimulus, growth will stall,” Mr Sanger said. His position was informed by slow growth of private sector credit since last year’s rate hike. “Another cut in CBR likely?” Sanger posed.

Njoroge reported that the banking sector had seen rising stability, compounded by improving liquidity and a recovery from the spike in non-performing loans in the last two months. The ratio of gross non-performing loans to gross loans fell marginally from 8.5 percent in May to 8.4 per cent in June 2016, CBK reported.

MPC explained that holding the benchmark rate at 10.5 per cent was informed by the outlook on inflation that remains stable, even though it expects prices of basic commodities to rise following new taxation on kerosene, super petrol and diesel.

“The Committee concluded that although demand pressures on inflation remain moderate, the effects of the recent increase in fuel tax were expected to exert temporary upward pressure on consumer prices. Nevertheless, overall inflation was expected to remain within the Government target range in the short term.”