Central bank base rates

Central Bank base rates

Kenyan lenders are seeking clarification from the central bank about which base rate they should use when determining loan costs, and may be forced to lower rates further if they’re advised the one they’re already using is incorrect, an industry lobby group said.

Banks last week began cutting the cost of loans to a maximum of 14.5 percent after President Uhuru Kenyatta on Aug. 24 signed a law setting commercial lending rates at no more than four percentage points above the central bank base rate. Two weeks later, lenders are still unclear whether that refers to the Central Bank Rate, currently at 10.5 percent, or the Kenya Banks’ Reference Rate, which is at 8.9 percent, said Lamin Manjang, chairman of Kenya Bankers Association.

“We used the CBR whilst we wait for that clarification, ” Manjang, who is also chief executive officer of Standard Chartered Bank Kenya Ltd., said by phone from the capital, Nairobi, on Tuesday. “In absence of specification, the banks have applied the CBR. We will have to adjust once there is that clarity.”

The central bank declined to comment when contacted on Tuesday. In a statement on its Twitter account, the bank said the KBRR is “the base rate for lending by commercial banks and micro-finance banks as well as for pricing mortgage products.”

The central bank later said on Twitter that post was an error and apologized for any inconveniences caused by it.

Bank Opposition

Central bank Governor Patrick Njoroge had opposed the proposal by lawmakers to cap interest rates, warning in February that regulating loan costs would be “damaging to the economy and regressive to growth.” Kenyatta approved the legislation, which also sets minimum payments on deposits, saying he sympathized with Kenyans frustrated by the cost of credit and poor savings rates.

KCB Group Ltd., Kenya’s biggest lender by assets, Stanbic Bank Kenya Ltd., Co-operative Bank of Kenya Ltd. and Barclays Bank of Kenya Ltd. are among financial institutions that have reduced borrowing costs to a maximum of 14.5 percent. They extended credit at a weighted average of 18 percent in June, according to the latest central bank data.

“Banks are more or less being proactive as we await clarity, ” Habil Olaka, the chief executive officer of the Kenya Bankers Association, said by phone. “When the rate is clarified, they can do the necessary amendments.”

Ineffective Tool

The central bank has in the past conceded that the KBRR was ineffective in transmitting monetary policy and said it was working on reforming it or replacing the gauge altogether.

While the amendment to the banking act probably refers to the CBR and not the KBRR, the new law is unclear, Sonal Sejpal, a director at Anjarwalla & Khanna Advocates said in an advisory note sent to its banking clients on Sept. 5.

“There is nothing in the act that suggests it should be CBR and not KBRR (or vice versa) and the ambiguity should be clarified, ” she said. “This is necessary even though the central bank has not announced that banks should be referring to KBRR and not CBR.”

In addition, the cap is not clearly stated in the new law because there are words missing, meaning the amended act can be interpreted in three ways, Sejpal said. The government gazette published on Sept. 1 sets the maximum interest rate that can be charged for a credit facility in Kenya at “no more than four percent, the base rate set and published” by the central bank.

That could mean that banks charge no more than 4 percent above the CBR, no more than 4 percent of the CBR, or no more than four percentage points above the CBR, Sejpal said. Banks have adopted the third interpretation.

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