Kenya Central Bank Sets Rate for Loan Charges, Sees More Reforms

  • Policy makers choose Central Bank Rate over reference rate
  • Lenders have to comply with new regulation by Wednesday

Kenya’s central bank told commercial lenders to peg their loan rates to the Central Bank Rate and flagged more reforms are on the way to improve the operation of the country’s credit markets.

The decision to use the CBR instead of the Kenya Banks’ Reference Rate ends weeks of uncertainty about which gauge lenders should base their lending costs on. The Kenya Bankers Association, an industry lobby group, had sought clarification from the regulator after the government last month capped commercial interest rates at four percentage points above the base rate.

“The base rate is the Central Bank Rate,” Governor Patrick Njoroge said in a statement sent to banks on Tuesday. The decision is in line with Kenya’s central bank laws, he said.

Kenyan President Uhuru Kenyatta’s approval of interest-rate caps comes after years of government and central bank efforts to persuade lenders to reduce their borrowing costs without using legislation. The enactment of the law fulfills a pledge the president made as part of his election manifesto in 2013 and comes a year before he seeks re-election for a second term.

‘Regressive’ Law

Central bank Governor Patrick Njoroge had opposed the proposals, warning in February that regulating loan costs would be “damaging to the economy and regressive to growth.” He declined to comment when asked on Tuesday about the new law.

Banks have warned credit could dry up if they can’t price loans according to the risks they are taking, which may hurt the $61 billion economy, East Africa’s biggest. The International Monetary Fund warned that legislation limiting how much lenders charge for credit risks impeding access to loans.

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,” the “politicization of monetary policy” bears risks for a sound financial system and for credit access, especially to risky borrowers, IMF Deputy Managing Director Mitsuhiro Furusawa said at a conference Tuesday in Nairobi.

Independence Compromised

“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 at a ceremony marking the Central Bank of Kenya’s 50th anniversary.

After the law was introduced, some of the country’s biggest banks said they would use the CBR, currently at 10.5 percent, to price their loans, Commercial Bank of Africa Ltd., a closely held lender, said it would use the KBRR, at 8.9 percent.

The wording of the rate-capping 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,” Njoroge said in the statement.

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