Repaying your bank loan or mortgage blindly, without knowing exactly the interest and other charges you are paying over and above the principle will now be a thing of the past. The Central of Kenya (CBK) has simplified and brought to your fingertips the ability to calculate the total cost of credit to inform your decision-making prior to taking up a loan product.
In partnership with the Bankers Association of Kenya (KBA), the CBK has launched a new Cost of Credit Website that will provide information on fees and charges relating to loan products offered by commercial and microfinance banks. Targeted are, particularly, personal secured loans, personal unsecured loans and mortgage loans.
The website also provides consumers with an advanced yet simplified Total Cost of Credit (TCC) calculator to inform their decision-making prior to taking up a loan product. It has also enabled two key outputs that allow consumers to compare loan facilities across banks: the Total Cost of Credit and Annual Percentage Rate (APR) as well as providing a repayment schedule which can be downloaded from the website by users.
Adapted to a new era of mobile banking, finally, the website also features a downloadable mobile application for customers’ ease in computing the cost of credit.
The website is the culmination of joint efforts by the CBK and the Kenya Bankers Association (KBA) to push for improvements, including transparency, so that customers will be able to learn more and have more choice, not just regarding rates but also based on customer service, speed and other qualities. APR pricing was initially introduced in May 2014 to allow consumers to compare different bank loan costs in terms of total cost of credit, based on standardized parameters and a common computation model.
Until recently, the dire economic situation had pushed many Kenyans to readily take up loans with little thought of the rates or mechanisms of payback. With the new website as well as additional information from tools such as the Kenya Banks Reference Rate (KBRR), they can now avoid this.
(KBRR) was established in July 2014 to replace the base lending rate used by commercial banks to price their products. It is determined based on the average central bank rate and the two-month moving average of the 91-day Treasury bill rate. The KBRR is set every six months (considering special circumstances) with banks allowed to determine what margin to add. Through these tools not only do consumers help themselves to competitive rates; they can also see how much more banks are charging as well as appreciate the reasons behind any increases or decreases.
Thanks to a new Credit Information Sharing (CIS) system, borrowers will also now be able to build their credit history and use it to negotiate for better credit terms. Positive credit history can also be used by borrowers as alternative collateral to traditional physical collateral. Through CIS credit providers such as banks and licensed Microfinance banks submit information about their borrowers to a licensed credit reference bureau so that it can be shared with other credit providers.
The development is particularly welcome in a lending industry that has so far been defined by mystery and misinformation. For a long time lenders had taken advantage of ignorant borrowers to overcharge loans through a system of hidden costs. These costs are in addition to the interest rate component, and range from bank fees and charges to third party costs, such as legal fees, insurance, stamp duty, valuation fees, security evaluation fees, security registration fees and government levies.
Because loan applicants will tend to focus only on the interest rate when making a loan decision, banks have proactively adopted the APR model which converts all direct costs associated with the loan (also known as the Total Cost of Credit) into one number. Big lenders with large customer bases had taken advantage of their dominance and the minimality of information on mobile banking platforms to offer borrowers the most expensive loans despite incurring lower costs of funds compared to smaller banks.