Banks adopt APR pricing mechanism for loans

July 21, 2014
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Kenya Bankers Association Chairman Joshua Oigara says banks will now begin disclosing to loan applicants the components that makeup the total cost of credit as a percentage known as Annual Percentage Rate/file
Kenya Bankers Association Chairman Joshua Oigara says banks will now begin disclosing to loan applicants the components that makeup the total cost of credit as a percentage known as Annual Percentage Rate/file
NAIROBI, Kenya Jul 21 – The Kenya banking industry has implemented the adoption of the Annual Percentage Rate (APR) pricing mechanism for loans.

Speaking during the launch, Kenya Bankers Association Chairman Joshua Oigara says banks will now begin disclosing to loan applicants the components that makeup the total cost of credit as a percentage known as Annual Percentage Rate.

The APR will be based on standardized parameters and a common computation model developed by the Association as well as related third party costs.

Among the standardized parameters include Kenya Banks’ Reference Rate(KBRR), plus individual banks administrative costs and product related fees, a risk premium and the bank’s profit margin among others.

On July 8, the Central Bank of Kenya (CBK) set the first KBRR at 9.13 percent, which will be the basis rate for banks to price their loans to borrowers.

This formula was developed as an outcome of discussions between the stakeholders, CBK and led by the National Treasury as a measure to bring down the cost of borrowing in the country.

Oigara said that it is anticipated that KBRR and APR will enhance pricing transparency while stimulating competition within the banking industry.

“Promoting transparency in lending remains a priority for the financial services sector and for banks in particular, we therefore are thankful to our stakeholders, including the Central Bank of Kenya and the National Treasury, for their partnership in this quest to enhance access to credit through progressive and enabling policies,” said Oigara.

Oigara also noted that KBRR and APR are just two of the interim and long-term interventions by the players to enhance credit access.

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