Parliament is set to reintroduce the Kenya Bankers Reference Rate (KBRR) as a base rate to calculate the cost of credit.
According to new proposed amendments to the Banking Act, Parliament’s Finance and National Planning Committee:
“Section 33B of the Banking Act is amended by deleting subsection (1) and substitution. Therefore the following new subsection: A bank or financial institution shall set the maximum interest rate chargeable for a credit facility in Kenya at no more than 4 percent above the base rate set and published by Kenya Bankers Reference Rate.”
Banking Circular No. 4 of 2016 sent to Chief Executives of commercial banks and mortgage finance companies from Dr. Patrick Njoroge, CBK Governor states:
“For purposes of section 33B of this Act, the base rate is the Central Bank Rate. This is in line with Section 36(4) of the Central Bank Act which requires that; “The Bank shall publish the lowest rate of interest it charges on loans to banks and microfinance banks and that rate shall be known as the Central Bank Rate.”
For purposes of section 33B (1)(a) which sets the maximum interest rate chargeable for credit facility “at no more than four percent, the base rate set and published by the CBK”, the cap will be set at four percentage points above the CBR.
Genghis Capital Analysts are of the view that if adopted the proposal would effectively:
1) Give some room for CBK to conduct monetary policy through CBR, slightly de-linking CBR and the cost of credit. However, the constraints on monetary policy would still exist under the proposed framework.
2) Reduce the cost of credit. The implied base rate under the KBRR framework would be 8.3% (an average of CBR and 2-month moving average of the 91-day T-bill, if the previous KBRR framework is maintained). Adjusting for the maximum lending rate would be at 12.3%.
3) Reduce consumer lending due to the lower risk premium compared to a medium-term (2 year) government paper which fetches about 10.9%, assuming KBRR components and construction is maintained as it was.
4) Subdue private sector credit growth, last reported at 4.3% in June 2018.
5) Slow down the process of enactment of the Financial Markets Conduct Bill, which had provided, among other proposals, to set a base rate for use by the sector and other informal credit providers.
In 2017, the Central Bank of Kenya (CBK) scrapped the KBRR following changes in the Banking (Amendment) Act, 2015 in August 2016.
KBRR was introduced in 2014 following discussions between commercial and microfinance banks, mortgage finance institutions, Kenya Bankers Association (KBA), Central Bank of Kenya (CBK), and The National Treasury. It is part of their recommendations to explore ways of enhancing the supply of private sector credit and mortgage finance in Kenya.
The primary purpose of the KBRR is to ensure that banks are transparent with respect to the cost and pricing of their products.
“The MPC considered the Kenya Bankers Reference Rate (KBRR), which was introduced to provide a transparent credit pricing framework. In view of the adoption of the new law capping interest rates, the CBK decided to suspend the KBRR framework,” said CBK Governor Patrick Njoroge in 2017.
The move left the Central Bank Rate (CBR) as the only credit pricing framework currently at 9 percent.
Interest-capping law allows banks to charge only four percentage points over and above the CBR, meaning they can only charge interest on loans at a maximum of 14 percent.
However, if the proposed amendments are passed the lending rate can only go as high as 11.6 percent.