Central Bank shelves APR formula

March 19, 2009

, NAIROBI, Kenya, Mar 19 – The quest by Kenyans to have better information while shopping for loan facilities will take longer than anticipated.

This is after the Central Bank of Kenya (CBK) and the Kenya Bankers Association rescinded a decision to introduce the Average Percentage Rate (APR) after a survey commissioned by the two institutions revealed that the public was more interested in full disclosure as opposed to the APR which incorporates other fees over and above interest rates.

APR is a standard formula used to determine the interest rate of a loan facility. In countries where it is in use, banking institutions normally agree on the items to include in the formula.

According to a presentation by Genesis, a South African company that was commissioned to carry out the study, most people considered the Average Percentage Rate tool too complicated.

“Kenyans are more interested in knowing the total cost of credit upfront,” said Richard Kentley from Genesis, adding that those interviewed preferred receiving the loan repayment schedule in advance.

He said this phenomenon was not unique to Kenya, because studies on the implementation of the tool in other countries had revealed either disappointment or a lack of understanding.

CBK Director of Bank Supervision Rose Detho said the bank had resolved to shelve the idea of the APR and decided to work on introducing disclosures on the total cost of credit and repayment schedules first.

“After having discussions between ourselves and the banking sector we have decided it will be best to start with the two tools at least in a year’s time,” Ms Detho said, adding that whatever tool is introduced, it would cover all financial institutions and not just banks.

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