Central Bank of Kenya sets record straight on loans benchmark rate

Central Bank of Kenya Governor Patrick Njoroge
Central Bank of Kenya (CBK) has thrown out the Kenya Bankers Reference Rate (KBRR) introduced in 2014 as a base rate to calculate the cost of credit.

The regulator’s decision making organ — the Monetary Policy Committee (MPC) — yesterday also maintained the benchmark interest rate at 10 per cent, sparing borrowers the high cost of credit.

The latest development scrapping KBRR follows changes in the Banking (Amendment) Act, 2015 in August last year, which now leaves the Central Bank Rate (CBR) as the only credit pricing framework.

The interest-capping law allows banks to charge only four percentage points over and above the CBR, meaning they can only charge interest on loans at a maximum of 14 per cent.

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“The MPC considered the Kenya Bankers Reference Rate (KBRR), which was introduced to provide a transparent credit pricing framework. In view of the adoption of the new law capping interest rates, the CBK decided to suspend the KBRR framework,”  said CBK Governor Patrick Njoroge who chairs the MPC in a statement yesterday.

The KBRR formula, computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury Bill (T-Bill) rate was introduced to help price loans fairly.

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It has, however, remained relatively ineffective with banks charging interest rates that were far higher than KBRR.

Last year, CBK even abandoned the formula following drastic T-B movements following a cash crisis in Government in 2015, which would have pushed it to 10.78 per cent.

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The regulator went against market expectations at the MPC meeting in January last year, retaining the benchmark for pricing loans at 9.87 per cent.

With the changed law, CBR has become a mandatory peg rather than indicative rate, making the monetary policy tool the determinant in pricing loans.

Yesterday, CBK also offered borrowers a reprieve by leaving the base rate of borrowing unchanged at 10 per cent for a second time since the coming into force of the rate-capping law.

Governor Njoroge said the MPC had not been able to review the impact of the new law on the banking system, adding that instead, banks were realigning to the new reality by changing their business models.

“The committee observed that available data was inconclusive for assessing the impact of the recent capping of interest rates,” he said. At yesterday’s meeting, the stability of the shilling also came under sharp focus, with the committee reiterating that the country has enough fire power to manage its volatility.

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