Friday, 1 August 2014

Central Bank of Kenya sets the Kenya Banks’ Reference Rate (KBRR)

The Central Bank of Kenya (CBK) did announce the first-ever Kenya Banks’ Reference Rate (KBRR). KBRR is the newfangled reference rate that has replaced the Base Lending Rate (BLR). It is worth noting that a reference rate is the rate, which determines the pay-offs in financial contracts. The parties involved in the contract have no control over the Reference Rate since none can manipulate. Over time, Kenya’s commercial banks have been using the BLR in pricing products such as loans.

During July 8, 2014, the CBK’s Monetary Policy Committee (MPC) set the rate at 8.50%. Again, KBRR was set at 9.13% with July 8, 2014 being its effective date. The directive by MPC means that all commercial banks have to price their products at 9.13% KBRR. This benchmark will be maintained until it is reviewed again on January 2015 lest market conditions change drastically.

Before the introduction of KBRR, commercial banks priced their loans through the BLR, which varied from bank-to-bank. The KBRR will therefore be the common Reference Rate across all commercial banks. The Total Cost of Credit (TCC) is the interest rate by commercial banks plus premium (k), which covers the cost of Risk, Margin and Funds by the banks. The KBRR means that commercial banks will not be in a position to manipulate their lending rates. The KBRR is common for all commercial banks. The only thing they have the freedom to manipulate is the premium (cost of Risk, Margin and Funds).

On a positive note, some commercials have already begun implementing the new MPC directive. This now heralds a new era for cheap loans in Kenya. CfC StanbicBank cut its BLR to 13.5% from 16%. Additionally, Standard Chartered Bank lowered the borrowing rates to 15.9% on personal loans, 14.9% on auto loans and 15.9% on mortgage bundles. This will open competition amongst commercial banks. This competition is healthy in the financial market and will eventually benefit the customer. The multiplier effects of such competition have long term effects on both micro- and macroeconomic variables.

The retail clients’ head in East Africa and Kenya for Standard Chartered Mr. Bhartesh Shah said: “Increased consumer appetite to borrow as well as an increasingly sophisticated consumer seeking more financial options prompted the bank to open up access to credit to people who wish to borrow but are otherwise restricted by the cost of credit,” said. Such actions lower the borrowing rate and eventually enabled more customers secure loans cheaply.

According to the CEO of Kenya Bankers Association (KBA) Habil Olaka: “The general direction of lending rates is downwards because the macroeconomic environment has been easing, the trend in the Central Bank Rate (CBR) is downwards, Treasury Bill rates are going downwards and deposit rates have also began moving downwards. The only problem has been transmitting that into the market.”

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