Use CBR to fix interest rates, CBK governor tells banks

Central Bank Governor Patrick Njoroge yesterday declared that interest rates on loans will capped at four percent above its benchmark lending rate.
By declaring Central Bank Rate (CBR) as the applicable base rate, Njoroge pulled the wind from the wings of Kenyatta family’s bank Commercial Bank of Africa which had gone against the grain in the banking sector and capped its loans against the Kenya Bankers Reference Rate which is 1.6 percent lower.
“The base rate is Central Bank Rate (CBR). This is line with central bank act which requires that the bank shall publish the lowest interest rate it charges on loans to commercial banks and microfinance banks and that rate shall be called CBR,” said a circular from Central Bank signed by governor Patrick Njoroge.
In a meeting held the previous week, banking managers under the auspices of Kenya Bankers Association chose to go with CBR when they capped loans at 14.5 percent which is four points above the CBR.
But Commercial Bank of Africa closely associated with the Kenyatta family broke ranks with the rest of the banking industry and set its caps based on Kenya Bankers Reference Rate.
KBRR was introduced to make the rate at which banks can lend profitably uniform. Previously, each bank set its own base rate and then added percentage points depending on the defaulting risk a borrower posed to the bank.
When Central Bank adopted KBRR, the banks were free to add percentage points based on the risks of their customers but the starting point at loan pricing was the same.
The flexibility on how many percentage points they can add on the base rate has been taken away by the new interest rates capping.
By using KBRR which is 1.6 points lower than CBR, CBA whose rates were to become applicable Wednesday had set its sights on becoming the bank with the cheapest loans at 12.9 per cent.
The move by Central Bank means that CBA has to play ball and raise its rates to avoid a situation where it pays higher interest rates on deposits and earns less in interest on loans.
Currently, KBRR, which was adopted in 2014 as the base rate for banks, stands at 8.9 percent which would have puts CBA’s most expensive loan at just 12.9 percent at its deposits rate at 6.23 percent.