CBK clarifies on interest capping rate as new regime kicks in today

Central Bank of Kenya (CBK) has clarified the rate that banks should use to base interest rates on loans.

In a circular to commercial banks, the banking sector regulator, which had hitherto remained mum on the issue since President Uhuru Kenyatta assented to a new law capping interest rates last month, said banks should peg pricing of their loans on the Central Bank Rate (CBR) as opposed to the Kenya Banks Reference Rate (KBRR).

The lack of clarity on the rate had sparked confusion in the banking industry ahead of commencement of the new law today.

“For the purposes of section 33B of this Act, the base rate is the Central Bank Rate (CBR). The bank shall publish the lowest rate of interest it charges on loans to banks and micro-finance banks, and that rate shall be known as the Central Bank Rate,” the circular dated September 13 reads in part.

The new law caps the interest charged on loans at no more than four per cent above the CBR.

This means that banks will from today charge a maximum of 14.5 per cent interest on current and existing loans, as the interest rate-controlled regime kicks in. The rate will apply on an annual basis.

To monitor the implementation, CBK has directed lenders to file specific documents within five days after the end of the month.

Further, banks will be required to submit to CBK before the end of this month, copies of their policies that will ensure they fully disclose to borrowers how much they are paying on loans, including all the hidden charges.

“Institutions should submit to the CBK by September 30, copies of their policies that will ensure full disclosure of all charges and terms for loans to borrowers,” the circular adds.

The move by the regulator now leaves Commercial Bank of Africa (CBA) at a crossroads as to whether to stick with its earlier decision to go with the KBRR, which in effect made it the cheapest lender in the market.

Unlike its peers such as the Co-operative Bank, Kenya Commercial Bank and Barclays Bank that have opted for the CBR, CBA reiterated in a media notice yesterday that it will lend at a maximum interest rate of 12.9 per cent.

If it chooses to stick with KBRR, the charges put the bank in good stead to compete with Savings and Credit Co-operative Societies (SACCOS) that lend at 12 per cent on average.

CBA said it will pay a minimum interest rate of 6.23 per cent (70 per cent of KBRR) on local currency interest bearing deposits. But this will now put it in noncompliance given that lenders will be required to pay 7.35per cent on deposits.

“Our decision to effect the changes based on the KBRR has been informed by our commitment to fully comply with the letter and spirit of the law as well as our long standing brand promise to enable our customers get more out of life,” CBA Group Managing Director Isaac Awuondo said in the notice.

Despite CBK’s clarification, the bank’s move is likely to stoke the debate as to which between the two rates should be adopted by lenders under the law.

The regulator had until yesterday evaded questions on the rate and kept lenders guessing even as it directed banks to make sure they comply with the new law by today.

For instance, I&M Bank had declined to comment on which rate it would use, saying it would await the regulator’s direction.

The mid-tier lender told its customers last week that was still waiting for guidelines from CBK on deposit rates.

The new law requires banks to pay up to 70 per cent interest on deposits.

Lenders that charge borrowers more than the stipulated interest rates will be fined Sh1 million or their bank chief executives imprisoned for one year.