News Column

Credit Score, Third Party Fees to Define Loan Costs

July 22, 2014

James Waithaka and Mary Wangui

From KBA CEO Habil Olaka, KCB group CEO Joshua Oigara and Simon Lee from farewell consultant during the annual percentage Rate implementation and launch on the cost of the credit website yesterday.Photo Enos Teche

A borrower's credit score, third-party costs and a lender's efficiency level will weigh significantly on lending rates moving forward as they determine the total cost of credit.

The new loan pricing mechanism known as the Annual Percentage Rate is now "customer-, product- and transaction-specific", meaning no two borrowers are likely to get an exact rate from lenders for the same facility owing to the variables.

The APR is the total cost of credit expressed as a percentage. The industry-wide method of calculating loan costs adopted this month is anticipated to boost transparency and competition in the credit sector.

It will help customers compare loan costs across lenders for similar products, while banks will compete on margins and efficiency to stabilise the APR.

Early this month, Central Bank'sMonetary Policy Committee unveiled the Kenya Banks Reference Rate, which is part of the credit cost as it will serve as a base rate for commercial banks.

KBRR is the average of the Central Bank Rate and the weighted two-month moving average of the 91-day Treasury bill rate. It will be reviewed every six months by the MPC unless economic conditions change drastically in between.

The MPC will thus exert its influence on the credit markets more directly through the CBR which is part of the KBRR. If the government reduces domestic borrowing it will also impact significantly on interest rates.

"The KBRR is the common reference benchmark while the APR is a disclosure mechanism," said Jared Osoro, director of policy and research at the Kenya Bankers Association.

Commercial banks will add a 'K' to KBRR, where K stands for costs above the base rate. More efficient banks will charge less in their direct costs, while more creditworthy customers will get lower rates depending on credit scores.

"The 'K' should be as close to zero as possible. It however has several elements accumulated under it such as the cost of funds, bank's administrative overheads, customer's credit risk premium, profit margins, third-party taxes like statutory levies," said Habil Olaka, KBA's chief executive.

KBA said the industry will require facilitation to reduce third-party costs, which introduce asymmetry in calculating the APR.

"External costs are really a challenge because they are outside our control. We will need facilitation such as improving company and land registries to ensure efficiency as such inefficiency reflects on the total cost of credit. We are also engaging other stakeholders such as the Law Society of Kenya to see if there is room to open up negotiations on the minimum legal fees set by law," Olaka said.

KBA has unveiled a website and a mobile application where borrowers can quickly calculate the APR by keying in the variables.

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Source: AllAfrica

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