Lenders yet to effect new pricing system for most bank loans

Money Markets

Mr Habil Olaka, the CEO of the Kenya Bankers Association. Photo/FILE 

By GEORGE NGIGI

In Summary

• CBK data shows only loans amounting to Sh825.8 billion issued by banks and microfinance institutions had been converted to the KBRR framework by end of April compared to a total loan book of Sh2.03 trillion.
• Banks have started pegging deposit rates on KBRR so as to ensure they protect their interest margins.
• The pricing mechanism was introduced mid last year and banks as well as micro-lenders given a year adopt the new platform with all new loans based on the standard base rate.

Less than half of the loans issued by banks are based on the new pricing mechanism, slightly less than two months to the regulatory deadline.

The Central Bank of Kenya (CBK) has ordered all loans be formulated using Kenya Banks Reference Rate (KBRR) as the minimum price.

Data from the regulator shows only loans amounting to Sh825.8 billion issued by banks and microfinance institutions had been converted to the KBRR framework by end of April compared to a total loan book of Sh2.03 trillion.

This is equivalent to 40 per cent of the lending in spite of the looming July 1 deadline.

“As indicated in the banking circular number 4 of 2014, existing flexible credit facilities shall be transitioned to the KBRR framework by June 30, 2015,” said CBK in a circular to the lenders.

The pricing mechanism was introduced mid last year and banks as well as micro-lenders given a year adopt the new platform with all new loans based on the standard base rate.

All banks are expected to price loans using a common base rate — which is the KBRR — set by CBK.

READ: Banks defy CBK, load profit margins on cost of loans

ALSO READ: Banks defy new loan pricing tool to rake in Sh141bn

The banks are allowed to load a premium to the base rate to cater for their cost of funds, credit administration fees and risk perception of the borrower in order to get the final price of the debt.

The Kenya Bankers Association expects its members to meet the deadline saying the slow shift had been occasioned by customer delay in signing new contract terms.

“We don’t see a reason to seek extension. Old loans had to be converted which partly requires rewriting the loan agreement and renegotiation of terms — as soon the customers sign then we will have a huge shift,” said chief executive Habil Olaka.

KBRR ensures banks pass on the benefit of lower interest rates to the borrowers while removing arbitrary increases to interest rates. It is reviewed every six months.

It is calculated as an average of the 91-day Treasury bill rate and the Central Bank Rate now at 8.5 per cent. This means for a loan charged 15.5 per cent, the premium or mark-up charged by the bank is seven per cent.

CBK said the average lending rate had declined to 15.5 per cent from 16.9 per cent in July last year while deposit rate had risen to 6.63 from 6.59 resulting in thinner interest spreads for the banks. “This trend is expected to continue as more loans are issued under the KBRR framework,” said CBK.