Kenyan Central Bank Sets CBR as the Base Rate for Loan Charges

NAIROBI, Capital Market in Africa: Kenya’s central bank said lenders should peg their loans to its Central Bank Rate, or CBR, in line with a new law capping costs and as the International Monetary Fund warned that legislation limiting how much lenders charge for credit risks impeding access to loans.

East Africa’s biggest economy has introduced restrictions on borrowing costs that set commercial rates at 400 basis points above a central bank base rate. Most banks, which have to comply by Sept. 14, had said they’d peg loans on the CBR that’s currently at 10.45 percent. The Commercial Bank of Africa had said it would price debt on the Kenya Banks’ Reference Rate, which is at 8.9 percent.

The Kenya Bankers Association, an industry lobby group, had sought clarification from the central bank on whether the base rate should be the KBRR or the CBR. The wording of the law has also been questioned by lawyers because it stipulates that banks should set their lending rates at “no more than 4 percent, the base rate set and published.”

“The cap will be set at four percentage points above the CBR,” according to a circular sent to lenders on Sept. 13 seen by Bloomberg. “The interest rates indicated in the Banking (Amendment) Act 2016, will apply on an annual basis.”

Central bank Governor Patrick Njoroge had opposed the proposal by parliament to cap interest rates, warning in February that regulating loan costs would be “damaging to the economy and regressive to growth.” He has yet to comment publicly on the new law that also compels financial institutions to pay interest on deposits of at least 70 percent of the central bank rate.

Compromising Independence
President Uhuru Kenyatta, who is seeking a second term in elections scheduled for August 2017, signed the law on Aug. 24, saying he sided with Kenyans exasperated by the cost of credit and low rates on savings.

While persistently high spreads between deposit and loan rates cause “understandable frustration among borrowers about the cost of credit, and has produced political pressure for interest rate controls,” IMF Deputy Managing Director Mitsuhiro Furusawa warned that the “politicization of monetary policy” bears risks for a sound financial system and for credit access, especially to risky borrowers.

“Linking deposit and lending rates to the central bank’s policy rate may compromise the independence of the central bank, and hamper its ability to enact monetary policy towards achieving its main objectives, that is to maintain price and financial stability and to support the economy,” Furusawa said in Nairobi, during a ceremony to mark the Central Bank of Kenya’s 50th anniversary.

Source: Bloomberg Business News