Kenyan banks have yet to get Government directive on whether to use the Kenya Banks’ Reference Rate (KBRR) or the Central Bank Rate (CBR) as the base for fixing rates for their interests on loans.

Kenya Bankers Association Chief Executive Officer Habil Olaka says banks are waiting for a resolution of the matter by the courts and the Central Bank of Kenya.

Most of the banks have however, complied but adjusted their rates using the CBR which is much higher than the KBRR.

CBR Vs KBRR

Activist Mr Okiya Omtatah complained to the Court that the banks have erroneously settled on the CBK rate (currently at 10.5 per cent) to price their loans instead of the Kenya Banks Reference Rate (KBRR) which is set lower at 8.9 per cent.

The Banking (Amendment) Act 2016, sets the floor for deposit rates at 70 per cent of the Central Bank of Kenya (CBK) base rate and a ceiling for lending rates at four percentage points above the benchmark rate.

Mr. Omtatah told the Court that using the KBRR, interest rates on bank loans should be capped at 12.9 per cent and not 14.5 per cent as announced by a number of banks using the CBR as the reference rate.

False Compliance?

“Several commercial banks have released Press statements to the effect that, in purported compliance with the new law, they will base their interest rates on the CBR not on the applicable KBRR.

“The difference between the interest rates prescribed by law and what is charged by the banks is a whopping 1.6 per cent,” Mr Omtatah says in his application.

He has sued the CBK and Kenya Bankers Association (KBA).

Purpose of KBRR

The Kenya Banks’ Reference Rate (KBRR) was introduced in 2014 as a uniform base lending rate across the banking sector to enable consumers compare the pricing of loan products.  Publication of information on interest rates for the banking sector was therefore expected to increase transparency, competition and to enhance credit access and lower the overall cost of credit to borrowers.

The lack of comparable information on pricing of loan products in the banking sector can expose borrowers to high interest rates.

KBRR is computed as an average of the Central Bank Rate (CBR) and the two-month weighted moving average of the 91-day Treasury bill rate.

KBRR is the interest rate a bank charges on riskless lending. Bank loans will be offered at an interest rate of KBRR + “K” – in the current case “K” being four per cent.