Economy

Banks cite gap in new interest rates capping Act

lobby

National Civil Society Congress president Maurice Odhiambo (left) with Consumers Federation of Kenya secretary general Stephen Mutoro address the media in Nairobi on Tuesday on the rates law. PHOTO | DIANA NGILA

Summary

  • The Kenya Bankers Association says lenders have to wait for the guidelines to establish the lending cap and deposit floor.

Commercial banks have said the interest capping law does not specify the base rate for determining the maximum lending cost, hinting at implementation delays.

The Kenya Bankers Association (KBA), said lenders have to wait for the guidelines to establish the lending cap and deposit floor.

The Act states that interest rate charged by banks will not exceed four per cent of the base rate set by Central Bank of Kenya (CBK).

“It has been assumed it is the Central Bank Rate (CBR) but CBK may opt to use Kenya Banks Reference Rate (KBRR) or CBR or it may create a new rate,” said KBA chief executive Habil Olaka.

Introduction of a new base rate set higher than the CBR, which is at 10.5 per cent, would push the lending rate up while also pulling the cost of some deposits.

The CBR is the price at which CBK lends to distressed commercial banks. The rate is reviewed every two months by the monetary policy committee which uses it to indicate to the market the direction it wants commercial rates to take. The rate is currently set at 10.5 per cent.

The KBRR, currently set at 8.9 per cent, is a standard base lending rate to be applied by bankers on which they are allowed to load an unregulated premium to cater for their cost of funds and profit margin. It is calculated as an average of the 91-day Treasury bill rate and CBR.

READ: Tough times for banks as Uhuru caps cost of loans

This means that if CBK opts to use CBR, the base the maximum lending rate will be 14.5 per cent and if it chooses KBRR it will be 12.9 per cent.

The minimum return offered to depositors will be 7.35 per cent under CBR and 6.23 per cent if KBRR is applied.

The Central Bank and the bankers have previously cited KBRR as being faulty due to the longer time it takes to be reset.

The rate is reset every six months despite using the three-month Treasury bill rate as a calculation factor.

The CBK and the bank’s lobby group are in the process of reviewing the KBRR.

The KBA also said it was waiting for guidelines on whether those with running loans will have their interest repayments slashed.

Legislators interviewed by the Business Daily have said they expect the law to take effect in 21 days given that it was a private member’s bill.

“This is our law so there are no regulations to be done – it is be apply explicitly,” said Kikuyu MP Kimani Ichung’wa.

The Attorney-General’s office has seven days to publish the Act which then becomes operational after 14 days.

It remains to be seen how the banks will navigate the controversial issue of migrating current loans to the new interest rates regime.

Most borrowers are currently on a flexible interest rates regime — meaning the cost of loans vary according to the prevailing market conditions — and therefore the expectation that they will be moved to the new regime once it comes into force.

Other issues to be clarified under the guidelines include whether the caps apply for foreign currency denominated credit and mobile-based loans.