New CBK Rule to Control Bank Interest Rates

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The Central Bank of Kenya (CBK) has introduced a new rule that changes how banks calculate the interest charged on loans. In the past, banks based their loan pricing on the Central Bank Rate (CBR), which is the interest rate charged to banks when they borrow money from the Central Bank. Currently, this rate stands at 9.75 %. In the new arrangement, they will use the interbank rate - the rate at which banks lend money to each other - as the starting point. Currently, the interbank rate stands at 9.62%. To this base rate, banks will add a small extra amount called “Premium K” to arrive at the final cost of borrowing. For clarity, a bank will often borrow money from another bank if it doesn't have enough cash to meet customer demands. If unable to borrow money from another bank, it will borrow from the CBK.

This change is meant to make loan pricing more transparent and consistent. Previously, banks used different methods to set their own base rates, which made it hard for borrowers to understand or compare loan costs. By tying loan interest to the interbank rate, which reflects real market conditions, borrowers will get a clearer and fairer picture of how much they are paying.

The CBK will also ensure that the interbank rate stays within about 0.75 percentage points above or below the Central Bank Rate. This control helps prevent sharp jumps or drops in borrowing costs, keeping things more stable for both banks and borrowers. Another adjustment is that interest will now be calculated using a compound method, meaning it builds on previous interest, which provides a more accurate and timely reflection of real borrowing costs.

For borrowers, this new system brings more transparency, quicker adjustments when market conditions change, and in some cases, the potential for lower costs if the interbank rate stays lower than the old pricing benchmark.
 
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