Commercial banks have petitioned the Central Bank of Kenya (CBK) to determine the cost of consumers’ loans using the interest charged on short-term loans between banks — interbank rate — in efforts to lower the price of credit.
In a proposal submitted to the CBK, Kenya Bankers Association (KBA), the industry lobby, wants consumer borrowing costs based on a single rate determined by average interbank rates over a two-month period.
The bankers reckon that the current model, where each bank has its own base rate, has failed to take the cue from monetary policy actions like cuts on the benchmark rate.
They have been pushing for an overhaul of the current risk-based pricing framework.
Both KBA and the CBK agree that the prevailing framework has failed to deliver cheaper credit to Kenyan borrowers fast enough, despite signals from the apex bank when it cuts its benchmark rate.
Under the proposed model, the lending rate would change every two months based on the bankers’ costs of funds and not a base that consumers are unaware of how it was determined.
“We propose that credit pricing in the industry be guided by an industry base rate computed as the two-month average of the interbank rate plus a premium K,” said KBA in its submission to the CBK.
“The use of the interbank, which is averaged across two months to minimize volatility,y helps to anchor credit pricing in the market on the new CBK monetary policy framework.”
The K will be based on the borrowers' risk profile.
Bankers argue that pegging the industry harmonised base rate on the interbank market rate will aid in ensuring consumers benefit from signalling from the CBK’s policy adjustments after the introduction of caps on the interest charged on short-term loans between banks.
The CBK on Tuesday reduced the width of the interest rate corridor around the benchmark rate to plus or minus 75 basis points from plus or minus 150 basis points.
This means that the interbank rate cannot rise above 0.75 percentage points of the Central Bank Rate (CBR) of 10 percent or 10.75 percent and not less than 9.25 percent.
"This will enhance stability of the interbank rate and align the rate closer to the Central Bank Rate," the CBK said Tuesday.
KBA has backed the use of the interbank rate in determining loan prices and called for a piloting.
“This will be instrumental in enhancing the transmission of monetary signals from the CBR to the lending rates via the interbank market,” said the bankers' lobby. “The stability of the base rate, going forward, will be anchored on CBK’s commitment to actively conduct liquidity injections and/withdrawals to ensure interbank market rates are aligned to the CBR.”
If endorsed by the CBK, the country will revert to the model of July 2014 and September 2016 when the bank’s base rate was unified and known as the Kenya Bankers Reference Rate (KBR), which was based on the 91-day Treasury bill rate.
But KBR was cited for its volatility.
“Despite the promise that the Kenya Bankers Reference Rate carried in enhancing transparency in credit pricing, its implementation faced two challenges,” said KBA.
“With the main one being the occasional temporary market volatilities, particularly from the foreign exchange market that called for Central Bank benchmark rate adjustments, thereby requiring Kenya Bankers Reference Rate adjustments with high frequency.”
On Tuesday, the CBK made a rare triple cut on key interest rates in a push to force commercial banks to cut lending rates and stimulate the economy. The CBK monetary policy committee cut the benchmark rate by 0.75 percentage points to 10 percent.
It also cut the range of interbank lending relative to the benchmark rate to 0.75 percentage points above or below the CBR.
The apex bank has also trimmed the penalty at which banks borrow from the CBK emergency window from three percentage points above CBR to 0.75 percentage points.
The banking regulator reckons that lenders have failed to fully transmit the cut to homes and businesses.
In February, only five of Kenya’s 38 banks had cut lending rates to match the reduction of the benchmark rate amid threats of daily fines.
Fourteen banks, including Access Bank, Premier Bank, Cooperative Bank and Eco Bank, increased their lending rates during the period, according to the latest CBK filings.
But the CBK says the lenders cut the loan rates further in March.
