No reprieve for borrowers as CBK keeps policy rate steady

The Central Bank of Kenya building in Nairobi. Photo/FILE
The Central Bank of Kenya building in Nairobi. The Treasury, bankers and the CBK have been under pressure to bring down lending rates and enable more Kenyans to access credit. Photo/FILE 

Hopes that Kenyans will begin to access bank loans cheaply fell apart on Tuesday after the central bank retained the policy rate at 8.5 per cent.

The policy rate — commonly known as the Central Bank Rate (CBR) — has been at 8.5 per cent since April last year and the expectation of a drop in interest rates was pegged on the Jubilee government’s promise of such a movement following last month’s successful sale of the Eurobond that raised Sh175 billion.

On Tuesday, the Monetary Policy Committee (MPC) also launched the much-awaited base rate that is expected to guide lending across the banking industry, setting it at 9.13 per cent.  

“Considering the CBR and the weighted two-month moving average of the 91-day Treasury bill rate, the CBK has computed and set the KBRR (Kenya Banks Reference Rate) at 9.13 per cent,” the MPC said in a statement signed by CBK governor Njuguna Ndung’u.

The rate is effective from July 8.


Prof Ndung’u said the KBRR would remain in place until January 2015 as long as conditions do not change drastically.

Bankers said they did not expect any change in the cost of credit in the near term but welcomed the KBRR as an instrument of transparency that would help customers to compare rates across various lenders.

The KBRR is calculated based on the monetary policy rate average and the 91-day Treasury bill average yield over six months.
The MPC said that it had maintained the CBR at the same level in order to anchor inflationary expectations and ensure price stability.
The KBRR is intended to standardise the way lending rates are set but different institutions will have the leeway to add a premium based on their own business costs, such as electricity, and the borrower’s credit profile.
This means the premium on loans is expected to vary from one institution to the other.
Habil Olaka, the Kenya Bankers Association (KBA) chief executive, said he expects the KBRR to infuse more transparency in the lending market and enable consumers to compare costs among different lenders.

Mr Olaka added that he also expects the KBRR to increase competition in the lending market but warned that there could be no telling whether the average interest rates would change in favour of the customer.

“What this rate does is introduce transparency such that a customer can tell the actual interest rate a bank is charging,” he said, adding that the expectation was not for lending rates to come down.

The KBRR is the product of proposals by a committee the presidency appointed to help deal with Kenya’s perennial high lending rates that have made it difficult for consumers to borrow long-term.

Kenya has a total mortgage loans book of only 20,000 customers — a low figure in a market of two million people in formal employment.

In May this year, banks also adopted the annual percentage rate (APR) to enable consumers to compare loan costs based on standardised parameters and a common computation model.

The APR discloses the entire cost of a loan, including the base rate as expressed by KBRR.

It then adds onto this other costs such as those arising from converting collateral into cash and possible judicial proceedings.

Banks were supposed to modify their systems and loan applications procedures to accommodate the APR disclosure requirement but that has so far not happened.

The Treasury, bankers and the CBK have been under pressure to bring down lending rates and enable more Kenyans to access credit.

On Tuesday, the MPC said in a press release that exchange rate stability was one of the reasons that prevented it from raising the policy rate.

Prof Ndung’u said the exchange rate has been largely stable supported by inflows from remittances and increased foreign investor participation at the Nairobi Securities Exchange (NSE).

“The build-up in foreign exchange reserves provides adequate cushion for the exchange rate against temporary shocks. This build-up of foreign exchange reserves will continue as the government utilises the proceeds of the sovereign bond,” he said.

Prof Ndungu said that usable forex reserves stood at $6.5 billion as at July 7.

Earlier interviews with market players showed that many were uncomfortable with either an increase or decrease in the policy rate.

“We do not see any reason for tightening or easing. Nothing in the economy suggests any need for change, so the central bank should just maintain the rate,” Chris Rwengo, head of trading at the Treasury Department of StanChart Kenya, had said.

Others saw the CBK as being caught in a difficult position on whether to ease or tighten rates, since it wants to keep the macroeconomic situation stable and at the same time promote economic growth through low interest rates.

“The CBK is caught between a rock and a hard place. It cannot raise or reduce the rate without some implications. It should probably wait for two months before making any changes to the CBR,” Alexander Muiruri, head of fixed income at brokerage firm Kestrel Capital, had said.