Banks unveil new loan calculation formula

The Central Bank of Kenya. Under the new model, banks will disclose the total costs associated with the loan

By O’brien Kimani

Commercial Banks have started using the new interest rates pricing method which is expected to make the process of borrowing more transparent.

The banks Monday unveiled the Annual Percentage Rate that is expected to compliment the Kenya Bank Reference Rate to ease the cost of credit in Kenya.

Kenya Bankers Association chairman Joshua Oigara however says government needs to address systemic challenges at the lands registry and security challenges which are external factors likely to impede cheap credit.

The new mechanism will allow borrowers to easily compare lending rates among banks in what is expected to heat up competition in the banking sector which has in the past been accused of operating a cartel like industry.

The Annual Percentage Rate will show the complete and true pricing of loans taking into account the Kenya Bank Reference Rate and other compulsory charges like legal fees, insurance costs, valuation fees, and government levies in calculating the borrowing rate.

Under the new model, banks will disclose the total costs associated with the loan, repayment schedule and the APR, but the cost may change every six months once the KBRR is reviewed.

KBA has also unveiled a web based interest calculator to help borrowers calculate the total cost of credit.

1 Comment

  1. james kiswaa
    July 22, 2014

    Thanks 4 such openness, but which rates would apply to already existing loans for instance loans took last year. Because to me i thought it will be good to be catered by new rates.
    moreover government should use state financial institutions to lower interest rates of commercial banks by ensuring they fund their institutions fully in order to encourage public borrow from them.