By DAVID HERBLING
In Summary
- “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.
- KBRR is calculated as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill rate.
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.
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.
hdavid@ke.nationmedia.com
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