The rate Kenyan banks want to use as excuse against interest rate controls

NAIROBI: Two years ago, a committee constituted by Treasury Cabinet Secretary Henry Rotich to deal with the costs of borrowing delivered its verdict.

It recommended that the Government come up with a transparent rate to show how banks arrive at the rates they charge borrowers.

On July 8, 2014, the Central Bank of Kenya (CBK) launched the Kenya Banks’ Reference Rate (KBRR), a rate that banks now want to use as an excuse not to implement a new law.

KBRR was born after discussions between commercial and micro-finance banks, mortgage finance institutions, Kenya Bankers Association (KBA), CBK and the Treasury to facilitate a transparent credit pricing framework.

At inception, CBK computed and set the KBRR at 9.13 per cent, and it was billed as the best tool to transmit monetary policy signals through lending rates.

BASE RATE

The KBRR was to serve as the base rate for all lending by commercial, microfinance banks, and mortgage finance institutions. But it is the existence of this rate alongside the Central Bank Rate (CBR) that lenders now want to use to challenge the new law.

“It has been assumed it is the Central Bank Rate, but CBK may opt to use the Kenya Banks’ Reference Rate or CBR, or it may create a new rate,” KBA Chairman Habil Olaka said last week.

The lobby added that lenders would have to wait for guidelines from CBK to establish the lending cap and deposit floor.

But Co-operative Bank has already signal what banks will be forced to use after it stuck to the CBR. However, since the KBRR is lower than the CBR, at 8.9 per cent currently, whichever rate they pick, banks will still have been cornered.

CBK has remained silent on the matter, days after President Uhuru Kenyatta approved the amendment to the Banking Act.

The success of the KBRR would have pacified legislators who had already sent signals that they were determined to pass a law controlling interest rates after an earlier one sponsored by Gem MP Jakoyo Midiwo collapsed in Parliament due to a technicality.

KBRR is computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury Bill rate.

Prior to the introduction of the KBRR, banks were using their individual base rates to price their loans.

But months after it was launched, banks continued with their old rates, which turned the KBBR into a toothless interest tool.

The KBRR is reviewed and announced by the CBK through a Monetary Policy Committee (MPC) press release every six months from the effective date, and is to be operationalised through banking circulars.

“The concept of a reference rate has been adopted by various central banks, including the South African Reserve Bank (SARB), as one way of enhancing the transmission of monetary policy signals from the policy rate to the lending rates,” CBK says in its newsletter.

If this rate had worked, the interest rate that individual banks would charge their customers would be KBRR plus a premium, depending on the lender’s cost of doing business, type of loan and risk profile of the customer.

To enhance transparency in the pricing of loans, commercial and micro-finance banks, and mortgage financiers were to disclose to their borrowers and CBK the breakdown of the composition of the premium.

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