CBA puts competitors on the spot with KBRR rate adjustment

September 10, 2016
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, CBA

NAIROBI, Kenya Sep 10 — The Commercial Bank of Africa (CBA) will as of Wednesday next week adjust its interest rates on new and existing loans to a maximum of 12.9 per cent.

The bank says it has based its rate on the Kenya Bank Reference Rate (KBRR) in compliance with the Banking Amendment Act signed into law last month.

CBA sets a new precedent as other banks that have lowered their rates have used the Central Bank Rate (CBR) that is currently at 10.5 per cent as their benchmark.

Kenya Bankers Association has already declared that all the banks will comply with the new law both on new and existing loans at 14.5 percent, based on the CBR given the four per cent over and above cap stipulated in the new law.

According to ICEA Lion Asset Management, the applicable base rate for the new law capping interest rates is the KBRR which is at 8.90 per cent.

“Banks — given the recent public announcements — are using the CBR rate to price loans and deposits which means a loan price of 14.5 per cent and deposit rate of at least 7.35 per cent yielding a spread of 7.15 per cent. The application of the KBRR yields a loan rate of 12.9 per cent and deposit rate of at least 6.23 per cent yielding a spread of 6.67 per cent. The banks have until September 14, 2016 to effect the new law,” said ICEA Lion Asset Management Chief Executive Einstein Kihanda.

Kihanda revealed that for the past 20 years, Kenyan banks have been enjoying interest rate spreads of about 11.4 per cent on average, way above the world average of 6.6 per cent.

“The Central Bank of Kenya Governor Patrick Njoroge is on record acknowledging that this is too high but he did not advocate for an interest rate peg as it will bring about rigidity in the financial system and may introduce a lot of shadow banking and shylocks as people who can’t access credit from the banks due to their low credit quality are priced out of the market,” he revealed.

He says by ‘squeezing’ banks returns through interest rate caps, there is a risk that the government will slow overall GDP growth by constraining lending growth.

“The move runs against the fundamentals of Kenya’s growth model: Kenya has been able to maintain such high rates of real GDP growth which are now almost twice the average in Sub-Saharan Africa precisely because it relies on investment as opposed to consumption or exports,” he said.

Meanwhile Activist Okiya Omtatah has moved to the High Court in a bid to have all banks revise their interest rates based on the KBRR.

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