More trouble for banks

Push for even lower interest rates spells doom for commercial banks

A Kenyan activist has asked the High Court to compel lenders to lower interest rates even further. Mr Okiya Omtatah is banking on the fact that the banks, which have been ordered to lower interests under a new legislation that caps rates, could be using the the wrong base to set the cost of credit.

The Banking (Amendment) Act 2016, which commences on September 14th, 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, who has sued the CBK and Kenya Bankers Association (KBA), says lenders 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 Business Daily reports.

The activist holds that by 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. He wants the High Court to compel the regulator and the Kenya Bankers Association to order banks to use the KBRR and not the CBR.

“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,” he says in court papers.

“The difference between the interest rates prescribed by law and what is charged by the banks is a whopping 1.6 per cent. The petitioner urges this court to intervene and interdict this deliberate threat before it materialises, by ordering the CBK and the KBA to ensure that interest rates are capped based on the KBRR and not on the CBR.”

He argues that KBBR was specifically developed to guide lending rates by banks while the CBR is a monetary policy tool. Co-operative Bank, CfC Stanbic and KCB last week announced that they had lowered their interest rates to 14.5 per cent for both new and existing loans.

Their move followed a two-week deadline given to all lenders to comply with the new laws capping interest rates.

[crp]