The Central Bank of Kenya has disputed reports that it plans to return to the era of interest rate caps amid concerns over the delay from banks to lower lending rates when the apex bank lowers its central bank rate.
The concerns emerged after CBK published a Consultative Paper on the Review of the Risk-Based Credit Pricing Model in April, inviting views from the public on a raft of changes. But the paper, which now enters the review stage, was misunderstood, according to the banking regulator.
According to CBK, the consultative paper prompted a response from different stakeholders, including banks, companies and some financial experts. The concerns raised include the understanding that CBK is seeking a return to interest rate caps, that was first introduced in 2016 and repealed in 2019.
Interest rate caps that were introduced in September 2016, through the Banking (Amendment) Act, 2016, led to the CBK setting interest rates that commercial banks and other financial institutions can charge on loans or pay on deposits. For example, if the CBR was 10 per cent, banks could not charge more than 14 per cent interest on loans and had to pay at least 7 per cent interest on deposits.
"The Paper elicited over 40 responses from a diverse range of individuals, commercial banks, non-bank financial institutions, industry associations, international financial institutions, consultancy firms, academia and corporate firms," CBK revealed in a statement.
In their statement on Tuesday, May 13, the CBK insisted that there were no proposals to reintroduce interest rate caps. The caps were previously removed because stakeholders observed that they made it harder to access loans.
Secondly, the CBK clarified that there were no changes to the monetary policy. In other words, the authority denied plans to change the way it manages the country’s money supply and interest rates.
"It (the Consultative paper) does not indicate that CBK will cease its monetary policy implementation framework anchored on the interbank rate as the operational target," the statement went on.
The CBK also revealed on Tuesday that small changes were made to strengthen monetary policy effectiveness. Notably, the width around the Central Bank Rate (CBR) has been narrowed from ±150 basis points to ±75 basis points in a move which the authority claims has helped make borrowing more stable and predictable.
Further, CBK also revealed it had adjusted the interest rate charged to banks which need emergency loans, known as the Discount Window. Previously, the rate was 3 per cent above the main rate (CBR), but it has been revised to merely 0.75 per cent higher to match the top limit of CBK's updated interest rate range.
As far as the proposed banking regulations from April are concerned, the CBK indicated that banking fees would be determined based on a bank's gross annual revenue.
This will include income from loans, government securities, fees, commissions, foreign exchange trading, and dividends.
Under the new proposals, the fees must be settled before a bank is granted a licence and will be payable on an annual basis, no later than 15 days after the publication of audited financial statements.
