Wednesday, July 09, 2014

1% Equals 20% and Other Bank Tales

The Central Bank of Kenya's Monetary Policy Committee has launched a KBRR a.k.a. the Kenya Bank Reference Rate and set it at 9.13%. All commercial banks and mortgage institutions are expected to price all their loan products around this. e.g Lend finance to customers at a rate of KBRR (+) or (-) "X" e.g. a loan rate of 15% will be known as KBRR +5.87%. This first rate of the KBRR set at 9.13%, will run from July 2014 to January 2015. 

The KBRR will help end the confusion that customers face with all manner of loans and rates at myriad banks. Different loans are pegged on interest rates that may be flat, fixed, variable, reducing balance etc and are marketed as the same without customers knowing what these measures mean. Yet a fixed loan rate of 1% per month (which some asset finance loans are marketed as) can be equivalent to a loan of 20% that is calculated using the reducing balance method.

The next step on the cards will be for Kenyan banks to adopt an APR (an annual percentage rate calculation) that not only includes the lending rate, but also factors in bank charges like commitment fees, facility fees, and third-party costs like legal charges, mortgage insurance, as well as a standard loan repayment schedule format for all loans.

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