CBA drives down cost of loans with KBRR pricing

Commercial Bank of Africa (CBA) will from tomorrow (Wednesday) price both new and existing loans at 12.9 per cent per annum, having opted to use a different pricing formula in compliance with the new law that sets the floor for deposits and caps lending rates at a maximum four percentage points above the base rate.

The mid-sized lender has opted to calculate the applicable lending rates using the Kenya Bank Reference Rate (KBRR) – which currently stands at 8.9 per cent – as the base rate in a move that is expected to stir fresh competition among the lenders.

Rival banks, including KCB, Co-op, Barclays, CfC Stanbic, and National Bank, have recently priced their loans at a maximum of 14.5 per cent, having chosen to use the Central Bank Rate (currently standing at 10.5 per cent) as the base rate.

The differences in pricing arise from the fact that the Banking (Amendment) Act 2016, which comes into force tomorrow, caps lending rates at four percentage points above the benchmark rate; and sets the floor for deposit rates at 70 per cent above the base rate, but the Central Bank is yet to state whether the CBR or the KBRR is the base rate referred to in the law.

CBA argues that KBRR, introduced in July 2014 by the Central Bank of Kenya as the ‘base lending rate,’ is the correct tool to use in calculating the cost of credit. “CBR is the benchmark rate used to conduct monetary policy and has never been the benchmark price for the credit market. I believe KBRR is the true representation of the base rate,” said Isaac Awuondo, the CBA group managing director.

“We’re being honest to our customers. This is for every customer – both with existing facilities and new. It is the market that will benefit from this,” said Mr Awuondo in an exclusive interview with the Business Daily.

READ: Banks shift customer accounts to avoid paying cash on customer deposits

CBA further disclosed that it will pay interest on deposits at the rate of 6.23 per cent per annum, applicable to savings accounts.

Though using the KBRR looks disadvantageous to CBA when it come to the pricing of loans, it on the flipside, leaves it with a lighter deposit rates burden because banks using CBR as the base must pay depositors higher returns starting at 7.35 per cent.

KBRR is calculated as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill rate.

The Central Bank of Kenya, through the Monetary Policy Committee (MPC) reviews the KBRR every six months, with the last review having been done in July 2016.

Curb inflation

The CBR on the other hand, is the interest rate the regulator charges as a lender of last resort to banks. The rate is reviewed and announced by the MPC at least every two months or whenever necessary, and is used as a policy tool to curb inflation, stabilise the local currency, and manage liquidity.

Kenya’s average lending rate stood at 17.96 per cent, term deposits attracted returns of 6.92 per cent, while interest on savings accounts stood at 1.4 per cent in April, according to latest CBK data.

Kenya Bankers Association chief executive Habil Olaka said most banks had opted to use the CBR to cap the loans, but were free to price using KBRR as the industry awaits guidance from the regulator.

“Banks are only using CBR to cap. You can still price on KBRR. The question of the applicable base rate should be directed to the CBK,” said Mr Olaka in an interview. CBK governor Patrick Njoroge refused to respond to our queries on what the base rate is.

Equity Bank, Kenya’s third-largest lender by market share with 8.7 million deposit accounts, has remained mum on the interest rate issue since debate began in earnest last month after President Uhuru Kenyatta signed the controversial Bill into law.

The 1.6 percentage-point difference between CBA’s interest rate and what peers are charging translates to billions of shillings in savings given that Kenya’s banking sector had gross loans and advances worth Sh2.2 trillion as at March 2016.

For example, interest on a Sh1 million unsecured loan at the rate of 14.5 per cent on a reducing balance and paid over 24 months amounts Sh157,986 while at the rate of 12.9 per cent the same loan would result in an interest charge of Sh139,877.

This is a difference of Sh18,109. The banks’ reference rate was developed to help increase transparency in credit market by allowing consumers to compare the price of loans among lenders.

Banks are currently allowed to disburse loans at an interest rate of KBRR + “K”, where the variable is the premium levied by lenders to cover risks. Mr Awuondo insists it is “the ‘K’ that is now capped at four percentage points. “Our risk management then has to be within this,” he says.

KBRR is the uniform base lending to be used by all lenders in Kenya, according to the CBK’s banking circular No. 4 of 2014 of July 9, 2014. “All banks and mortgage finance companies will price their flexible rate loans using KBRR as the base rate. The interest rate they charge their customers will be KBRR+K,” reads the circular titled Operationalization of Kenya Banks’ Reference Rate.

CBA is one of Kenya’s largest private banks in which the Kenyatta family owns a 24.91 per cent stake through an investment vehicle dubbed Enke Investments Ltd.

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