Banks yesterday introduced the Annual Percentage Rate (APR), a loan pricing mechanism that is expected to enhance transparency, but warned rates would only fall significantly if reforms are made in State agencies that offer support to the financial sector.
The APR helps to tell a borrower in one number the actual cost of the loan, including one-off costs such as loan processing fee, stamp duty fees and insurance charges. The rate ensures transparency in the cost of a loan and allows a potential borrower to compare prices between different lenders.
For example, a Sh11 million mortgage repayable in 10 years at 15.6 per cent results in an APR of 19.6 per cent. The difference is due to one-off charges such as stamp duty fee equal as a percentage of the house value, valuation fees, insurance premium of 0.5 per cent and processing fee of 1.5 per cent of the loan.
But the lenders said government borrowing and inefficiency in the Lands offices will continue to dictate the price of loans. With the introduction of the rate that captures all costs associated with a loan, the banks said they had met their end of the bargain with the Treasury in the quest for lower lending rates, and the ball was now in the government’s court.
The banks were required to implement a standard base rate, referred to as Kenya Banks Reference Rate, that they started using last week, and also disclose the actual cost of loans through the APR.
“For you to have a reduction of interest rates that is sustainable, there is need to have other players who influence the interest rates come on board,” said Kenya Bankers Association head of research Jared Osoro.
The APR also ensures that banks use the same pricing model of reducing balance and not a flat rate, which sounds low but ends up being more expensive as interest is charged on the principal borrowed and not the remaining amount.
KBA has created a website to help borrowers calculate their cost of credit. The Central Bank is also in the process of setting up a website which will allow borrowers to compare interest rates charged by different banks, thus entrenching competitiveness in the sector.
The Treasury said it was hopeful that increased transparency will strengthen competition within the banking sector and push down the cost of borrowing, which has kept many enterprises from using debt to grow their businesses.
But the bankers pointed out that transparency is not enough to pull interest rates down and said they are pushing the government to accelerate reforms in the Lands and companies registries which will boost their confidence in properties given banks as security.
“Beyond interest rates, there are other costs that influence access to credit. And through the Cost of Credit Committee, the government, regulators and industry have identified priority initiatives to address these inefficiencies,” said KBA Chairman Joshua Oigara.
Cost of borrowing by the government has also been put on the radar by banks which blame high Treasury bill and bond rates for their pricing. Commercial banks prefer lending to the government, which is seen as risk free and they load a premium on the government rate to price their loans.