Treasury imposes new rules to rein in commercial loan costs

Kenya will introduce a new formula for banks to use in pricing loans, seeking to bring down high interest rates that have stifled lending to businesses and home buyers, the Finance Ministry said on Wednesday.

Commercial lending rates in the country stand at 21 per cent on average, while deposit rates average under 10 per cent, angering consumers who accuse banks of taking too much profit. Customers in other African markets make similar complaints.

Kenyan banks say their operating costs are higher than those in more advanced markets and that they lack a developed credit rating system for screening customers.

Under the new system, the Treasury, or finance ministry, said bank lending rates would be linked to the Kenya Banks' Reference Rate (KBBR), which is based on averages of the monetary policy rate and the 91-day Treasury bill yield over six months.

They would be allowed to add a premium based on business costs, such as electricity, and the borrower's credit profile, the ministry said in a statement, adding the system was based on proposals by a committee appointed by the presidency.

Kenya has been improving its credit rating system slowly.

The Treasury did not specify by how much this would lower lending rates on average but said the aim was to lower commercial borrowing costs. However, it said that new loans issued from next month would be priced using the formula while banks would have a year to recalculate the interest on existing loans.

There was no immediate comment from bankers, who said they still wanted to see the KBBR level before reacting.

"It is a very good move by the Treasury," said Wilfred Onono, the managing consultant at Interest Rates Advisory Centre (IRAC), an organisation that works with distressed borrowers.

"The Central Bank Rate (CBR) is supposed to influence lending rates but it has been largely ignored in the past. Now when the KBBR is issued, they will have to make reference to this rate," he added.

The committee also made several other recommendations including increasing the efficiency at the country's land registry to reduce the cost of securing collateral.