21 July 2014

Kenya: Banks Adopt APR Pricing Mechanism for Loans

Nairobi — The Kenya banking industry has implemented the adoption of the Annual Percentage Rate (APR) pricing mechanism for loans.

Speaking during the launch, Kenya Bankers Association Chairman Joshua Oigara says banks will now begin disclosing to loan applicants the components that makeup the total cost of credit as a percentage known as Annual Percentage Rate.

The APR will be based on standardized parameters and a common computation model developed by the Association as well as related third party costs.

Among the standardized parameters include Kenya Banks' Reference Rate(KBRR), plus individual banks administrative costs and product related fees, a risk premium and the bank's profit margin among others.

On July 8, the Central Bank of Kenya (CBK) set the first KBRR at 9.13 percent, which will be the basis rate for banks to price their loans to borrowers.

This formula was developed as an outcome of discussions between the stakeholders, CBK and led by the National Treasury as a measure to bring down the cost of borrowing in the country.

Oigara said that it is anticipated that KBRR and APR will enhance pricing transparency while stimulating competition within the banking industry.

"Promoting transparency in lending remains a priority for the financial services sector and for banks in particular, we therefore are thankful to our stakeholders, including the Central Bank of Kenya and the National Treasury, for their partnership in this quest to enhance access to credit through progressive and enabling policies," said Oigara.

Oigara also noted that KBRR and APR are just two of the interim and long-term interventions by the players to enhance credit access.

"Beyond interest rates, there are other costs that influence access to credit. And through the Cost of Credit Committee the Government, regulators and industry have identified priority initiatives to address these inefficiencies," he said.

Among them include reforms of the Lands and Companies Registries; establishing the legal and regulatory framework to support the creation of an electronic movable assets register; and expanding credit information sharing beyond KBA Member Banks to all regulated banks and other entities, including non-bank credit providers, utilities and mobile network operators.

"With these and other initiatives that will be overseen by the Cost of Credit Committee, I fully believe that as a country we will ultimately have a more efficient credit system and, enhanced access to credit," he added.

KBA also launched the Credit Calculator Online website www.costofcredit.co.ke and mobile application which provides the relevant information on the industry's new pricing regime.

On his part KBA Chief Executive Officer Habil Olaka said that the industry-led APR implementation was also a consumer protection intervention that highlights banks' commitment to provide customers with facts that they need to make informed credit decisions.

Olaka said the new website also feature tools for borrowers to use when making a loan decision, including a quick APR estimate and a comprehensive calculator that capture all the costs associated with a loan facility.

Next time you apply for a loan : enquire about the KBRR, have the bank provide you with the total Cost of Credit and Loan Repayment Schedule, ask for the APR, use the APR to compare your first option with similar loan products in the market.

In 2013, total loans and advances stood at Sh1.6 trillion, with credit expansion going up 7 percent to Sh1.7 trillion in the first quarter of 2014.

As at May 2014 average lending rates stood at 15 percent down from 17.43 percent in 2013 and 22 percent in 2012.

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