14th of September, 2016 marks the beginning of the new interest rate capping regime in Kenya. You can save up to 42% interest on loan, and earn additional 350% on deposit. This follows the signing into law on the 24th of August, 2016 the Banking (Amendment) Bill 2015 by President Uhuru Kenyatta.
The law sets the maximum interest rate chargeable for a credit facility at 4% above the base rate set and published by the Central Bank of Kenya (CBK). The law also sets the minimum interest rate paid on deposit at 70% of the base rate.
On 13th of September, 2016, CBK quickly moved in to clarify that the base rate is the Central Bank Rate (CBR) currently at 10.5%. This was necessary to give guidance since some banks had adopted CBR while others had adopted KBRR (Kenya Bank Reference Rate) as the base rate leading to confusion in the industry. It should also be noted that currently there is a pending case in court to compel banks to use the KBRR as the base rate.
But, whether the base rate is CBR or KBRR, the true meaning is that if you borrow today, you stand to save up to 42% on interest, and if you deposit today, you stand to earn additional 350% on interest.
To illustrate this point, I have used Simple Interest Rate Calculation as follows:
Assuming you borrowed (or deposited) Kshs.1,000,000/- from a bank before and after the interest rate capping law.
Loan Before Interest Rate Capping Law
- In June, 2016, the Weighted Average Lending Rates was 18.18%. This means you will be required to pay (1,000,000 x 18.18%) i.e. Kshs.181,800/- as interest.
- For those banks charging up to 25%, you will be required to pay (1,000,000 x 25%) i.e. Kshs.250,000/-.
- With current CBR rate of 10.5% as the base rate, interest rate capping will be (10.5% + 4%), ie 14.5%. This means you will pay (1,000,000 x 14.5%) i.e. Kshs.145,000/-.
- Revising your old rate of 18.18% to comply with the law, you will save (181,800 – 145,000) i.e. Kshs.36,800/- translating to 20%.
- Revising your old rate of 25% to comply with the law, you will save (250,000 – 145,000) i.e. Kshs.105,000/- translating to 42%.
- Should the reference rate turn out to be KBRR currently at 8.9%, your saving would be 30% and 48% respectively.
Deposits Before Interest Rate Capping Law
- As at June, 2016, the Weighted Average Deposit Interest Rates stood at 1.6% meaning you would be paid (1,000,000 x 1.6%) i.e. Kshs.16,000/- as interest on.
- With interest rate capping law, banks will be required to pay you a minimum of (10.5% x 70%) i.e. 7.35%. You will therefore receive a minimum of (1,000,000 x 7.35%) i.e. Kshs.73,500/-. Your additional income will be (73,500 – 16,000/-) Kshs.57,500/-. This translate to a whopping 359% more income.
- Should the base rate be KBRR additional income would be 289%.
CBR is not a fixed rate and KBRR is based on CBR. It is determined by the Monetary Policy Committee (MPC) of the Central Bank. CBR fluctuated from a low of 6% in July, 2010 to a high of 18% in December, 2012. This is 300% fluctuation. Currently it stand at 10.5%