The Central Bank Rate (CBR) and a new benchmark rate for pricing loans have converged at 8.75 percent, creating a single industry stand for assessing the cost of credit.
The Kenya Shilling Overnight Interbank Average (Kesonia), which is the overnight lending rate among banks that was launched in December, has settled at an average of 8.75 percent in recent weeks to match the CBR, resulting in a uniform loans reference rate.
The convergence of the two rates implies that the banking industry now has a single reference rate for loans, making it easy for customers to compare loan prices between various lenders applying different metrics.
The Central Bank Rate (CBR) and a new benchmark rate for pricing loans have converged at 8.75 percent, creating a single industry stand for assessing the cost of credit.
The Kenya Shilling Overnight Interbank Average (Kesonia), which is the overnight lending rate among banks that was launched in December, has settled at an average of 8.75 percent in recent weeks to match the CBR, resulting in a uniform loans reference rate.
The convergence of the two rates implies that the banking industry now has a single reference rate for loans, making it easy for customers to compare loan prices between various lenders applying different metrics.
The final revised risk-based credit pricing model was anchored on Kesonia which was designed to increase transparency and lower credit costs.
Banks were, however, allowed to deploy the CBR benchmark as a backup option.
The preference for CBR over Kesonia was attributed to the shortened window given to banks transitioning to the revised risk-based pricing by CBK.
Almost all tier-one banks have adopted the CBR as their benchmark rate for loan pricing including Equity, KCB, Absa Bank Kenya, Standard Chartered, NCBA and DTB.
The Cooperative Bank of Kenya was an outlier, opting for Kesonia as its benchmark alongside Habib Bank AG Zurich and ABC Bank.
Two banks, Citibank N.A. Kenya and Stanbic Bank Kenya, adopted both CBR and Kesonia.
Previously, each commercial bank had its own approved benchmark from which to price loans, but the model ran into chaos by creating 37 different reference rates.
The divergence in rates was seen to impede cheaper borrowing costs for customers.
Kesonia can only rise by 0.5 percentage points above the prevailing CBR rate and must not fall below the benchmark by more than 0.5 percentage points.
The corridor implies that Kesonia and CBR would only differ slightly.
The convergence of the rate increases the efficiency of monetary policy decisions by CBK, allowing banks to quickly translate movements in the apex bank’s benchmark to loan pricing.
‘Essentially, an alignment implies effective transmission of monetary policy to the interbank market,’ added Mr Molenje.
‘Any instance, where CBK does not participate in affecting marketing liquidity conditions, via injections or withdrawals, would yield an interbank rate (Kesonia) that is misaligned with the CBR. This would mean that there is no transmission of monetary policy.’
Banks’ lending benchmarks are now aligned with the CBR, where a rise in the rate is followed by higher borrowing costs, while cuts anchor lower loan interest rates.