Govt imposes new rules to rein in commercial loan costs
05 June 2014, 09:30
Nairobi - Kenya will introduce a new
formula for banks to use in pricing loans, seeking to bring down
high interest rates that have stifled lending to businesses and
home buyers, the Finance Ministry said on Wednesday.
Commercial lending rates in the country stand at
21 percent on average, while deposit rates average under 10
percent, angering consumers who accuse banks of taking too much
profit. Customers in other African markets make similar
Kenyan banks say their operating costs are higher than those
in more advanced markets and that they lack a developed credit
rating system for screening customers.
Under the new system, the Treasury, or finance ministry,
said bank lending rates would be linked to the Kenya Banks'
Reference Rate (KBBR), which is based on averages of the
monetary policy rate and the 91-day Treasury bill yield over six
They would be allowed to add a premium based on business
costs, such as electricity, and the borrower's credit profile,
the ministry said in a statement, adding the system was based on
proposals by a committee appointed by the presidency.
Kenya has been slowly improving its credit rating system.
The Treasury did not specify by how much this would lower
lending rates on average but said the aim was to lower
commercial borrowing costs.
New loans issued from next month would be priced using the
formula while banks would have a year to recalculate the
interest on existing loans, the Treasury said.
There was no immediate comment from bankers, who said they
still wanted to see the KBBR level before reacting.
"It is a very good move by the Treasury," said Wilfred
Onono, the managing consultant at Interest Rates Advisory Centre
(IRAC), an organisation that works with distressed borrowers.
"The Central Bank Rate (CBR) is supposed to influence
lending rates but it has been largely ignored in the past. Now
when the KBBR is issued, they will have to make reference to
this rate," he added.
The committee also made several other recommendations
including increasing the efficiency at the country's land
registry to reduce the cost of securing collateral.