The Kenyan government is set to impose tough regulation rules of money lending. Through the Central Bank of Kenya (CBK), a new formula for banks to use in pricing loans will be introduced lowering high interest rates.
According to a press statement from the National treasury, Kenya’s level of private sector credit is way below international peer countries like Mauritius, South Africa and Malaysia whose private sector credit to GDP ratios are above 100 per cent.
“The total number of mortgage accounts in Kenya currently stands at 20,000 which is significantly below the demand for housing units of more than 200,000 per year and growing. There is therefore an urgent need to increase the supply of new and affordable housing units. This should be supported by affordable mortgage finance to facilitate uptake of the units,” the press statement read.
(READ MORE: Kenya's mortgage system carries pricy tag)
The recommendations by the committee is to ensure that all banks use a transparent pricing framework to be known as Kenya Banks’ Reference Rate (KBRR) which will be published by CBK and be effective for a six month period.
“This is basically the bank's base rates because currently if you look at the existing pricing module, a bank is ever lending at base minus or plus a certain percentage. So what KBRR will be doing is taking away banks setting their own pace rates,” George Bodo, Head of the Financials Desk at Ecobank Research told CNBC Africa.
The bank is expected to issue this rate after every six months with banks tracking the KBRR and then pricing their loans after factoring in such considerations like the borrower’s risk profile and cost of funds.
“The bank's internal base rate is a reflection of borrower risk and cost of funds. That is how they look at the market based on those two then they charge the base rates. They have standardised the base rates across. It will be a reference especially when it takes effect on 1 July and the banks will be required to use the KBRR,” Bodo explained.
The banks will be allowed to add a premium based on business costs and other factors. However, according to Bodo, the governments agenda of bringing down the lending rates to single digits will not work.
“In my view, I don’t think KBRR framework is changing anything. It doesn’t alter anything from the existing scenario. If a bank feels the KBRR is low then they will adjust the premium up in order to recover for the lost margin,’ Bodo said.
Other recommendations by the national treasury are disclosure of bank charges, implementation of the National Payment Systems, enhancing financial services, consumer protection and financial education.