The Central Bank of Kenya yesterday identified the Central Bank Rate (CBR) as the tool that commercial banks must use in their pricing of loans, effectively shielding the government’s rising appetite for local borrowing from determining the cost of credit in the new dispensation of interest rate controls.
CBK Governor Patrick Njoroge confounded industry players with his mid-day announcement that threw the Kenya Banks’ Reference Rate (KBRR) out of the window in favour of the product of a boardroom decision by the Monetary Policy Committee (MPC).
“The base rate is the Central Bank Rate, (CBR)” the CBK said in banking circular No. 4 of 2016 issued yesterday and sent to all bank executives.
The decision, which comes into force this morning, is seen as exposing borrowers to external and political considerations – and not purely economic factors – in the pricing of credit.
“It means the MPC will lock itself in a room using information that is only known them to determine the cost of loans,” said Jeremiah Owiti of the Centre for Policy Analysis and Research (CPAR).
KBRR, which currently stands at 8.9 per cent, is a tool that the CBK jointly established with the commercial banks and which factors in the government’s short-term borrowing – in the pricing of credit.
The Central Bank Rate currently stands at 10.5 per cent.
Use of the CBR as the base rate in the pricing of credit puts immense powers in the hands of the Monetary Policy Committee who may use it to kill several birds with one shot.
It enables the MPC to control for external factors such as the price at which the government is borrowing while pricing loans – meaning the State can increase its borrowing from the domestic market without the fear of impacting financial markets negatively.
The decision gives the National Treasury an upper hand to order banks to lend at a certain price regardless of its own behaviour in the credit market.
Commercial Bank of Africa, which had adopted KBRR in calculating the rate caps, said use of the signal rate is likely to tie loan rates to macroeconomic factors outside the credit market.
“One of the challenges is being tied hostage to other factors, which are not lending-related per se,” said Isaac Awuondo, group managing director at CBA.
Credit: Business Daily