Which is the base rate that commercial banks are supposed to use to price their loans? Is it the Central Bank Rate (CBR), now at 10.5 percent, or the Kenya Banks Reference Rate (KBRR), which is at 8.9 percent? Central Bank of Kenya (CBK) Governor Patrick Njoroge has come out clear and declared that the CBR is the legitimate base rate. The commercial banks regulator even went ahead to show how this is clearly outlined in the law. It is worth noting, though, that the CBR gives commercial banks a higher margin than the KBRR.
The following is what Dr. Njoroge had to say in regard to this raging debate in a circular to lenders:
“For purposes of section 33B of this Banking (Amendment) Act, 2016, the base rate is the Central Bank Rate (CBR). This is in line with Section 36(4) of the Central Bank of Kenya Act.”
The CBK went ahead and said the following to put it clear that indeed the CBR is the base rate envisaged in the Banking Act for purposes of setting the maximum cost of loans chargeable on borrowers:
“The (central) bank shall publish the lowest rate of interest it charges on loans to banks and microfinance banks, and that the rate shall be known as the CBR. The interest rates indicated in the Banking (Amendment) Act 2016 will apply on an annual basis.”
Dr. Njoroge went ahead to add:
“Accordingly, institutions should submit to the Central Bank of Kenya by September 30, 2016 copies of the policies that will ensure full disclosure of all charges and terms for loans to borrowers.”
This simply means that the banks will be required to give full disclosure on fees and other charges on loans.
Just as a reminder, the Banking (Amendment) Act 2016 simply sets the ceiling for lending rate at 4 percentage points above the base rate. It goes ahead to set the floor for deposit rates at 70 percent above the base rate.