Kenya is introducing alternative debt channels in an effort to lower lending rates and drive savings.

The National Treasury plans to issue the first-ever government bond to be offered exclusively through mobile phones with over 23 million Kenyans expected to participate in the first Ksh5 billion ($46.83 million) issue.

Investors will subscribe with amounts as low as Ksh3,000 ($28.1), down from the usual Ksh50,000 ($468.35). The product is open to investors from the other four EAC partner states — Burundi, Rwanda, Tanzania and Uganda — under a protocol that treats them as locals.

The move means small investors — who get measly returns from banks, if at all — have less motivation to keep money in financial institutions. On the demand side for government securities, it means the monopoly by banks on auctions will be significantly reduced, enabling the Central Bank to raise cheaper money.

This would leave the banks with higher liquidity, prompting them to innovate and lend more to the private sector at lower interest rates.

The latest move comes amid concerns over the effectiveness of the Kenyan Banks’ Reference Rate (KBRR) in reducing the cost of credit.

“The success in bringing down the level and spread of interest rates will depend on the implementation of measures agreed upon by the stakeholders, including the implementation of KBRR; hence KBRR alone is not the panacea,” said Habil Olaka, chief executive of the Kenya Bankers Association (KBA).

According to KBA, KBRR was meant to complement other policy and structural measures to assure sustainability of the reduction in both interest rates levels and spreads.

Kenya’s lending rate fell to 15.7 per cent at the end of August from 16.9 per cent in July 2014 while the interest rate spread (difference between lending and deposit rates) declined to 8.8 per cent from 10.3 per cent in the same period.

As a result, CBK has called for the strengthening of the KBRR framework and enhancement of innovation by banks to lower the cost of credit.

“With or without KBRR, banks need to innovate new products to lower the lending rates,” said CBK Governor Dr Patrick Njoroge.

KBRR was introduced in July 2014 to ensure that lenders are transparent with respect to the cost and pricing of their loan products.

“The real concern has always been that the two variables used to derive KBRR— the Central  Bank Rate (CBR)  and the 91-day T-bill rate— may not be fully representative of the business environment, such as cost of funds,” said George Bodo, head of  banking research at Ecobank Capital Ltd.

Under KBRR, banks are required to disclose and explain to their customers the effective base rate (KBRR) and any additional premium (K) above the base rate.

KBRR is calculated as an average of the CBR and the 2-month weighted moving average of the 91-day Treasury-bill rate. The 91-day Treasury bill rate indicates the risk free assets while CBR reflects the position of the Central Bank’s monetary policy.

Thus, a customer is expected to be charged a lending rate of KBRR + “K,” where “K” includes the   profit margin, risk premium and other overhead costs of the bank.

Francis Mwangi, head of research at Standard Investment Bank (SIB), said, “Since KBRR was introduced the CBR has never gone down. In such circumstances, it is difficult to assess the impact it has had on lowering lending rates.”

KBRR is adjusted every six months while Central Bank’s Monetary Policy Committee (MPC) sits every two months to review the developments in the  macroeconomic environment and take appropriate action by reviewing  the CBR — the benchmark  lending rate to commercial banks.

Analysts reckon that at the time KBRR was being launched, the two variables (CBR and 91-day T-bill rate) were almost at par but they have since pulled far apart, distorting market conditions.

“In fact, the spread between the two has widened significantly to the tune of 700 basis points. This wide gap distorts market conditions. Therefore, I think there’s need to introduce one or two more variables into the calculation of KBRR,” said Mr Bodo.