Markets & Finance

Why new CBK tool may not deliver cheaper loans soon

kerrow

Senate Finance and Commerce Committee chairman Billow Kerrow. Photo/FILE

Loan rates are only likely to fall when other costs such as the period it takes to register collateral and make judgments in disputes reduce, banking analysts said on Wednesday.

The analysts said that the new calculation method for the base lending rate, the Kenya Banks’ Reference Rate (KBRR), focused only on transparency of interest-rate pricing while the other costs remain unaddressed.

They, however, noted that there was progress towards removing some of the impediments to cheaper loans, including the ongoing digitisation of the Lands registry and provision of more titles for land.

“We need to tackle those other costs that have little to do with interest rates. Let’s complete land title digitisation and improve judicial processes; let’s make it easier to realise collateral in case of default,” said an analyst who cannot be quoted because he is not authorised to speak on behalf of his group.

A survey conducted by the Central Bank of Kenya in September 2010 showed that the cost of credit is determined by the cost of funds, credit risk, liquidity risk, T-bill rate, realisation of collateral, judicial processes and the general cost of doing business, among other factors.

The KBRR and the annual percentage rate (APR) – intended to increase transparency and comparability between the prices of credit in different institutions – came into effect on July 8 and July 1, respectively. The APR shows the total cost of credit for an individual, which involves various elements ranging from interest rates to risk premium.

READ: No reprieve for borrowers as CBK keeps policy rate steady

But even as bankers and analysts maintained that the cost of credit after the introduction of two new ways of calculating lending rates would not necessarily lead to low interest, participants at an accountants’ seminar yesterday said that rates should go down.

The Kenya Bankers Association (KBA) has already said that the KBRR method would only help in transparency of rates, but not necessarily the cost.

The first rate for KBRR has been set at 9.13 per cent, and will be applicable for the next six months unless there are drastic market changes justifying its review.

“The issue of affordability of interest rates has been of major concern. We expect that KBRR will bring about cheaper loans. This is because we expect lending rates to come down significantly in the next few weeks or months,” said Billow Kerrow, chairman of the Senate’s Finance and Commerce Committee.

Mr Kerrow, who is also the Senator for Mandera, said that there were already encouraging signs that the cost of business – as a factor in lending rates – was coming down, noting that the process of registration of businesses had been reduced to a day from several weeks.

The senator said that small and medium enterprises face the biggest hurdles when borrowing, noting that the existing structure and regulations tended to favour organisations which are already flush with liquidity.

Henry Obwocha, one-time minister for Planning and National Development in former President Moi’s government, said it was unclear how banks would deal with a possible adverse outcome of the legal challenge relating to Section 44 of the Banking Act, which had forbidden the institutions from increasing the cost of loans without informing the Finance minister.