Reprieve for borrowers as new pricing tool forces banks to cut rates

The Monetary Policy Committee (MPC), a key policy-making organ of the Central Bank of Kenya (CBK), has published a new loan pricing tool, which could see lending rates drop.

This would be a major reprieve for those seeking credit as they will be able to window-shop and negotiate for cheap loans. Although those already servicing old loans will not benefit, borrowers seeking for new loans at floating rate will benefit from the new arrangement. Customers will also be able to compare what rates different banks are loading onto the Kenya Bank Reference Rate (KBRR), the new benchmark rate introduced by CBK.

While the MPC decided to retain the Central Bank Rate (CBR) at 8.50 per cent, it has set the KBRR at 9.13 per cent. “This level of the KBRR will be effective from July 8, 2014 until its next review in January 2015, if conditions do not drastically change,” said Prof Njuguna Ndung’u, chairman, MPC.

“Considering the above CBR set by the MPC and the weighted two-month moving average of the 91-day Treasury bill rate, the CBK has computed and set the KBRR at 9.13 per cent.”

“This new pricing tool will introduce a more transparent and competitive method that will enable customers compare rates offered by various banks. Those that charge highly above the KBRR will eventually be forced to push their rates down,” said Habil Olaka-Chief Executive Officer, Kenya Bankers Association (KBA).
MPC met yesterday to review market developments and the outcomes of its previous monetary policy decisions. The Committee noted that overall inflation remained within the upper bound of the prescribed range of the medium-term target of 5 per cent in May and June 2014. The pricing tool has been published weeks after Treasury laid out an elaborate plan to force commercial banks to push down the rates they charge on loans and advances to customers.

Affordable credit

“The KBRR regime is expected to bring in transparent disclosure of bank charges through the Annual Percentage Rate (APR), thus making credit affordable and accessible to as many Kenyans as possible,” said National Treasury Cabinet Secretary Henry Rotich while unveiling the 2014/15 budget before parliament.

Attempts by CBK monetary policy committee to use the CBR to guide interest rates have always been ignored by banks. While the CBR has been at 8.5 per cent for months, no commercial bank has lowered its interest rates during this period. Before January’s decision, the CBK had made 700 basis points (bps) of cuts in the current cycle, which began in July 2012 when rates were at 18 per cent. With the rate of credit growth increasing, those CBR cuts appear not to be feeding through to the credit market.

While banks only disclose details to a more informed customer, the KBBR regime now requires that banks must make more disclosures to a customer seeking for credit. These include negotiation, legal, administration and insurance fees as well as the actual cost of the loan.

The CBK will be required to publish this rate after every six months with banks tracking the KBBR and then pricing their loan accordingly after factoring in such factors as customers risk profile and cost of doing business.