Kenyan lenders are rushing to implement the new Banking Amendment Act, banking on its grey areas to protect their interest income.

By Friday, KCB Bank, Guaranty Trust Bank, Barclays, Chase Bank, CfC Stanbic, Diamond Trust Bank, Co-operative Bank and Standard Chartered Bank had announced that they had lowered interest rates on existing loans, in line with the new law capping the cost of loans at 14.5 per cent.

Despite the regulations not having been clear on what kind of base lending rate the cap would be using, several banks have reduced their rates based on the Central Bank Rate (CBR), which currently stands at 10.5 per cent, instead of the Kenya Bankers Reference Rate (KBRR), which is at a lower 8.9 per cent — a rate they have used since 2014 to price their loans.

Prior to the banks’ compliance, Kenya Bankers Association chief executive Habil Olaka had said the law does not specify the base lending rate for determining the maximum four percentage points lending cost, casting doubts on whether the lenders would implement the law before its gazettement.

“It has been assumed it is the CBR, but the central bank may opt to use the KBRR or the CBR or it may create a new rate,” said Mr Olaka.

The KBRR is revised every six months by the central bank to guide banks when pricing credit and is an average of the 91-day Treasury bill rate and the CBR.

KCB Group chief executive Joshua Oigara said they were awaiting clarity on what base lending rate would be used despite the banks choosing the CBR.

“It is upon the gazettement of the rules that we will have clarity on whether it is the CBR or KBRR that will be used. For now, we have decided to apply the 400 basis points to the CBR,” said Mr Oigara, declining to give reasons why KCB chose to go with the CBR rate.

The banks’ move is seen as creating an industry-wide trend, that should the KBRR be touted as the base lending rate, then the banks have already whipped the regulator to their side with their quick, but tactical compliance and also protects their interest income.

Daniel Kuyoh, senior research analyst at Alpha Capital said banks are going with the CBR as the presumptive cap on the basis of Central Bank’s policy signal.

“With the law offering clarity on deposits and using the CBR as the benchmark, I believe it works the same on loan interest,” said Mr Kuyoh.

“The Central Bank could also develop a new base rate for the banking sector. It is up to them to issue a policy framework to outline the implementation of the new law,” said Kuria Kamau a research analyst at Kestrel Capital.

However, analysts at Renaissance Capital said the widely held assumption was that banks would price loans in line with the CBR, which is revised every two months.

“Banks use KBRR as a standard base lending rate on which they add a premium and factor in their costs. This would have been their default rate,” the analysts said in a note.

The classification of mobile banking products has also come under scrutiny, with Mr Oigara saying the law does not talk about microfinance institutions under which mobile lending falls.

Equity Bank, Commercial Bank of Africa and KCB are some of the country’s biggest beneficiaries of the mobile money lending, with annual rates of between 60 per cent and over 100 per cent.

In a clear move to hedge against anticipated reduced revenues as rates shrink to 14.5 per cent, banks have also taken advantage of the grey areas to continue charging higher rates while saying it is only the Central Bank that can offer clarity on the matter.

“It is an issue we have not been able to finalise on. We do believe that finally, the Banking Amendment Bill will affect some mobile loans as well,” said Mr Oigara.

KCB’s partnership with Safaricom’s M-Pesa has disbursed $103 million in loans in the last year, charging loans at six per cent a month or 72 per cent annually, while Equitel, a product of Equity Bank, issued loans worth $208 million by end of June, with an interest rate of one-two per cent monthly or about 12-24 per cent annually.

The CBA M-Shwari product, a partnership with Safaricom currently disburses loans for a one-month period for a one-off interest rate of 7.5 per cent.

“The law is also unclear on forex loans, mobile money loans and credit card lending. It is up to the central bank to issue clarity on its applicability,” said Mr Kamau.

Banks are also hoping that customers will refinance their existing loans, which will benefit the banks and guard their long-term interest income.

“As a bank, we would be happy to see them take up top ups and other refinancing facilities,” said Annastacia Kimtai, KCB group director of retail banking.

Acting National Bank managing director Wilfred Musau said that it will be well for the customers to enjoy the rates review through a cocktail of choices they will be presented with.

Banks have also been silent on the requirement that they pay a minimum of 70 per cent of the base rate for deposits. Out of the five banks that have reduced their rates, it is only CfC Stanbic and Co-operative Bank that have said they will honour the clause on deposits.

CfC Stanbic chief executive Philip Odera said their customers will enjoy a deposit rate of 7.35 per cent in compliance with the new law. Some lenders have been offering deposit rates of as low as two per cent.