The Central Bank yesterday directed commercial banks to apply the 10.5 per cent Central Bank Rate as base in pricing loans, clearing confusion among lenders.
Banks are from today required to charge a maximum interest of four percentage points above the CBR ( 14.5 per cent ) and pay at least 70 per cent of the CBR ( 7.35 per cent) on term deposits. This is in line with the lapse of 14 days grace period from the publication of the Banking (Amendment) Act 2016 on August 31.
“For purposes of Section 33B of the Act, the base rate is the Central Bank Rate (CBR),” CBK governor Patrick Njoroge said in a circular. He cited Section 36( 4 ) of the Central Bank of Kenya Act which provides for setting and publication of the CBR – the lowest charge by the CBK on loans to banks and microfinance institutions.
The confusion on the deposit accounts, which qualify for the 7.35 per cent interest, however, persists after the regulator remained silent.
All lenders, except one, which had complied with the law prior to today’s deadline had applied the CBR. Only President Kenyatta’s family-owned Commercial Bank of Africa had used the 8.9 per cent Kenya Banks Reference Rate, which was prior to the amended law applied as an industry-wide base rate, although it is not anchored in law.
Banks which charge “interest rate in excess of that prescribed by law” in contravention of Section 2 of the law will be fined not less than Sh1 million or on default, the chief executive will be jailed for not less than a year under Section 3.
Njoroge directed banks to continually file with the CBK for scrutiny, their interest charges reports within five working days from the end of the month.
“Accordingly, the first returns for end of September 2016, should be submitted to CBK by October 7, 2016,” the CBK boss said. Banks must also submit to the CBK copies of their policies to ensure all loan charges are disclosed to the borrowers in line with Section 31A of the Act.
“The CBK will put in place additional measures to enhance the cost of credit, disclosures and strengthen the credit information sharing mechanism,” it said.