Banks to use CBR to price loans as CBK clears the air

After weeks of speculation the Central Bank of Kenya (CBK) has clarified that commercial banks will use the central bank rate (CBR) to price loans.

The banking regulator has remained quite since President Uhuru Kenyatta signed into law the Bank (Amendment) Act in August, leaving banks scratching their heads on what rate to calculate interest charged on credit.

Through the Kenya Bankers Association (KBA) had said the lack of clarity had made it difficult to implement the new law.

With the new guidelines, interest rates will drop to a maximum of 14.5 percent based on the current CBR of 10.5 percent.

“For purposes of section 33B (1) (a) which sets the maximum interest rate chargeable for a credit facility ‘at no more than four percent, the base rate set and set and published by the CBK’ the cap will be set at four percentage points above the CBR,”CBK governor Dr Patrick Njoroge said in a circular to commercial bank chief executives.

The confusion also saw activist Okiya Omtatah move to court seeking to compel banks to price loans based on the Kenya banks’ reference rate (KBRR).

The new law takes effect from Wednesday 14 September.

A number of banks had already committed to lower interest on existing and new credit facilities to 14.5 percent based on the CBR.

On Friday however, Commercial Bank of Africa changed the narrative when it announced that all new and current loan facilities will be priced at 12.9 percent based on the KBRR rate of 8.9 percent.

“The new rates will be based on the KBRR as advised from time to time by the Central Bank of Kenya. KBRR current stands at 8.9 percent. As a result CBA will lend at a maximum interest rate of 12.9 percent for all local currency credit facilities and pay a minimum interest rate of 6.23 percent on local interest bearing deposits,” CBA said last week.

The bank did not immediately reply on whether it would re adjust its loan pricing in line with the guidelines.

The banking regulator further clarified that interest rates will apply on an annual basis.

Commercial banks will be expected to file monthly compliance reports with the CBK as well as disclosing all prices associated with the loan to a borrower before issuing credit.

To strengthen oversight, banks have until September 30 to furnish the regulator with copies of their lending policies to ensure there’s full disclosure.

The CBK had been opposed to the capping of interest rates arguing it could have a negative ripple effect.

Dr Njoroge told bank executives that there was need for further reforms in the banking industry to improve operations of the credit market.

“In this regard, the CBK will put in place additional measures to enhance cost of credit, disclosures, strengthen the credit information sharing mechanism and improving inter-bank liquidity management,” Dr Njoroge said.