What is KBRR and how does it differ from what Banks are currently doing?
Kenya Bank’s Reference Rate (KBRR) is a benchmark rate prescribed by the Central Bank of Kenya for pricing all floating / variable / flexible interest rate (Kenya shilling denominated) loans or credit facilities. This covers, overdrafts, mortgage loans, stock loans, invoice/bill discounts, asset finance loans, personal loans, credit card facilities; amongst others. It applies to all the Banks and Mortgage Finance Companies regulated by the Central Bank of Kenya and effectively replaces the Base Rates that were previously used for these types of facilities.
In the past, banks priced their credit facilities using an internally determined rate (i.e. Base Rate). The formula for calculating the Base Rate varied from bank to bank and it was considered that this did not allow for clear comparisons of lending rates by customers. Banks will therefore price their Kenya shilling denominated floating / variable / flexible interest rate facilities using the KBRR plus a margin that will be determined by the factors listed in FAQ 9.
Who determines the KBRR?
The KBRR is set by the Central Bank of Kenya’s (CBK) Monetary Policy Committee (MPC) which is also responsible for making any future amendments to the rate based on the monetary and economic environment in the country.
How is the KBRR determined?
The KBRR is based on the Central Bank Rate and the risk-free rate in the market (i.e. the 91-Day Treasury Bill rate). It is calculated using an average of the Central Bank Rate (CBR) and the weighted 2 month moving average of the 91 day Treasury Bill rates.
Is the KBRR fixed or is it subject to change?
The KBRR, being a factor of the monetary and economic environment and given that these change from time to time, will be subject to changes / revisions by the CBK’s MPC in line with these indicators.
The CBK has advised that the KBRR rate will be reviewed every 6 months. However, in the event that market conditions change before the expiry of the 6 month period, this could trigger a review that could result in an earlier change of the KBRR.
Is the use of the KBRR by Banks optional?
This is an initiative led by the Banking sector regulator (i.e. CBK) and has been introduced through an existing legal framework that enables the CBK to introduce regulations for financial institutions’ adherence. All Financial Institutions that are regulated by the CBK are therefore required to implement the KBRR in their lending criteria for floating / variable / flexible interest rate. This applies to ALL Kenya Shilling denominated credit facilities.
Is there any impact to existing customers who already have credit facilities with NIC Bank Ltd?
Customers with floating / variable / flexible interest rate Kenya Shilling denominated credit facilities will also have the KBRR applied to the pricing of their facilities. This will, however, be staggered over a 12 month period from July 2014 (i.e. Banks have up to 30th June 2015) to transition existing credit facilities, (i.e. those drawn before 8th July 2014), to the new benchmark – KBRR. The Bank will communicate this change prior to the transition to the new KBRR framework. Existing facilities will therefore continue to run as they have at the rate agreed upon with the Bank as detailed within the signed Letters of Offer until they are transitioned to the KBRR.
The Bank shall inform existing customers with credit facilities on the transition as and when the modalities are concluded.
For customers who took up loans or credit facilities from 8th July 2014, the new benchmark rate already applies to them and will be revised from time to time in line with changes to the effective rate as shall be communicated by the Central Bank of Kenya and in line with the Consumer Protection Regulation requirements.
For new applicants, the prevailing rate, (i.e. KBRR), will apply and changes will be made from time to time in line with changes to the effective rate as shall be communicated by the Central Bank of Kenya and in line with the Consumer Protection Regulation requirements.
Are all loans impacted by this change?
This change applies to ALL Kenya Shilling denominated loans or credit facilities whose pricing is quoted using a floating / variable / flexible interest rate.
Kenya Shilling denominated loans or credit facilities that are on fixed interest rates (e.g. IPF) or such other base rates applicable as advised by the Bank from time to time (e.g. foreign currency rates) will not be affected by this change.
Does this mean that we will be changing the ‘customer rate / gross rate’ whenever there is a change in the KBRR?
The customer rate / gross rate quoted for credit facilities is priced based on several factors which have been listed below in a separate FAQ. The change brought about by the KBRR is in relation to a benchmark rate aimed at standardising what Banks historically referred to as their Base Lending Rates. All Banks will now have a common Base Lending Rate, (i.e. the KBRR), while the pricing will continue to be driven by the factors that determine credit pricing per institution and per customer which may or may not lead to a revision of the customer rate / gross rate.
Note: All Credit facility documents will now refer to the KBRR as the reference / benchmark / base rate.
What are the other associated costs that impact pricing? What are the factors that dictate the bank’s margin?
The primary factors that determine the margin to be applied by Banks (i.e. ‘K’) include: