About the Kenya Banks’ Reference Rate (KBRR)

About the Kenya Banks’ Reference Rate (KBRR)

The Central Bank of Kenya (CBK) has announced the first Kenya Banks’ Reference Rate (KBRR). The new reference rate replaces the Base Lending Rate, which commercial banks used to price their products. The rate is computed by CBK based on an average of the Central Bank Rate (CBR) and a 2-month moving average of the 91-Day Treasury Bill Rate.

Following the 8^th July 2014 Monetary Policy Committee meeting during which the CBR was held at 8.50 percent, the initial KBRR has been set at 9.13 percent. The effective date is 8^th July.Therefore all new loans issued by commercial banks should be priced on the 9.13 percent KBRR.

The KBRR is announced by CBK through Monetary Policy Committee Press Release and operationalised via CBK Banking Circular. It is expected that the announcements will be made by CBK every 6 months (or more frequently depending on market conditions). 

FREQUENTLY ASKED QUESTIONS

What is the KBRR and how is it different from the Annual Percentage Rate (APR)?

Previously, banks used to price their loans using a Base Rate. The formula for calculating the Base Rate varied from bank to bank. Central Bank of Kenya has now prescribed a common Reference Rate known as the Kenya Banks Reference Rate or KBRR.

KBRR factors in CBK's monetary policy direction (based on the Central Bank Rate) and the risk free rate in the market, which is the 91-Day Treasury Bill rate. 

For further pricing transparency, members of the Kenya Bankers Association in 2012 voluntarily adopted the Annual Percentage Rate or APR pricing model. APR is the numerical representation of the Total Cost of Credit. The APR implementation was undertaken in 2013 with the effective date taking place on 1st July 2014.

What is the Total Cost of Credit?

The “Total Cost of Credit” or TCC will include the bank interest rate based on the KBRR plus a premium (or the “k”) that covers the banks’ Cost of Funds, Margin and Risk. Third Party Costs directly associated with the loan are also covered in the TCC, these include legal fees, insurance, valuation, and government levies. The TCC, including estimates for third party costs, should be provided to all loan applicants prior to contract signing. 

Why is APR the Most Transparent Cost of Credit Disclosure?

Because banks will use the TCC model developed by Kenya Bankers Association (KBR) to calculate the APR, borrowers are empowered to compare loan products on a like for like basis; and therefore make more informed decisions on all the components of the loan (interest rate plus all charges and third party costs). 

What is APR and will it make loans cheaper?

There are various costs associated with a loan. To better determine the total cost, a prescribed formula should be used to compute the various elements into a numeric representation (a percentage number). When this percentage number is factored over a 12 month period, it is called the Annual Percentage Rate (APR). 

In most countries APR is mandated by law. But in Kenya, the banking industry has proactively adopted the APR model in conjunction with the CBK’s requirement that banks provide customers with the Total Cost of Credit (TCC) and Loan Repayment Schedule. 

While the APR and TCC disclosures do not directly have an effect on the cost of credit, customers will be empowered to shop around for the loan products that meet their needs. The enhanced transparency will also stimulate competition within the banking industry thus contributing to more competitive interest rates for customers with a good credit track record. 

Which other initiatives are banks working on to address high interest rates?

The banking industry in collaboration with Central Bank is spearheading a number of interventions to enhance credit access. These initiatives, which are at different stages of implementation, include: the Credit Information Sharing initiative which will enable banks to price their loan products based on individual customers’ risk profile; and development of a Reference Rate upon which banks will replace the Base Rate and serve as a standardized reference rate for all banks. 

Through the Cost of Credit Committee Chaired by National Treasury, KBA has also proposed several other measures meant to address the inefficiencies that contribute to higher costs within the financial services industry, including reforms within the Lands and Companies Registries.

It is important to note that the high interest rate regime is not permanent; once market stability is attained, rates trend downwards, as we have seen in the recent past. A good signal that the market is indeed responding to the decline in interest rates is the increased uptake in credit during 2013 and First Quarter 2014 (as reported by the Central Bank).

Courtesy of Kenya Bankers Association

Ezesha(105% Financing) Frequently Asked Questions

Ezesha (105% Financing) Frequently Asked Questions

1.    Who is the target market for Ezesha?

This product is ideal for customers who can qualify for a mortgage facility but are discouraged by the initial costs associated with acquisition of property. These costs include the down payment and closing costs. Therefore the target market includes the young low to medium income earners or first-time mortgage borrowers.

2.    Who is being insured under Ezesha?

It is HF that will be insured but the cost of the premium will be passed on to the customer who will be required to pay an annual premium.

3.    Is the 3% annual insurance premium payable for the whole term of the loan?

The insurance cover is committed for a period of 3 years with option of renewing it for further 3 years. The maximum period allowable under Ezesha agreement is 6 years.

4.    Will Ezesha premium be constant for the period in which it will be in place?

Yes it will.

5.    Why have we put a cap of Kes 15Million on the maximum property value or a maximum gross salary of Kes 350,000?

These parameters were agreed upon between HF and Britam who are the insurers. The initial intention of Ezesha was to target the low to medium income earners who are the most affected when it comes to raising down payments and closing costs.

6.    In the Ezesha process flow, at what point is the developer paid? Is it during loan conveyance or at disbursement?

The developer will be paid after perfection of the security. The developer will be issued with HF undertaking to pay 100% of the property value after customer returns our loan offer.

7.    At what point is the down payment paid to the vendor?

HF will issue an undertaking to pay 100% to the developer on acceptance of offer by the customer. Payments of the 10% deposit and stamp duty will be made after due diligence of title is done by advocate.

8.    Will developers accept to sign the Offer letter based on a HF Letter of Undertaking?

A Letter of Undertaking is legally binding and it compels HF to pay. Further, HF is a reputable brand in the real estate industry and developers should be comfortable with HF Undertaking.

9.    If we disburse the 10% deposit to the vendor before charging the property, aren’t we going to run the risk of finding a property with a caveat?

To avoid such a situation we will not release funds until a due diligence is done on the property. Once instructions are received by lawyer, a search is first initiated before the registration process begins hence caveats and other encumbrances will have been captured.

10.  How will we give the vendor comfort since they usually give buyers 7 – 14 days to raise the deposit?

Time is of essence to the success of this product. Due to loan amounts involved i.e. up to 10M maximum, the short approval matrix will enable approval before 7 days ONLY IF all the application requirements are complied with.

Doing it right first time is of utmost important.

11.  What happens to developers who are unwilling to accept the Letter of Undertaking and prefer cash before signing of the agreement with the purchaser?

We will offer a bank guarantee subject to security perfection. We will educate our customer that it is in our mutual interest not to make a payment without due diligence of title being conducted on the property.

12.  What happens if the vendor or the purchaser opts out?

The terms of the sale agreement addressing break of contract will apply.

13.  Is the deposit paid out by HF transferable if the deal falls through?

Terms of the sale agreement on break of contract will apply.

14.  How can an SME client qualify for Ezesha loan?

Any SME with net earnings before tax of Kshs 350,000 per month qualifies.

15.  Will the product be able to cater for buy-and-build customers?

Yes, it will.

16.  Can a customer do an equity release (Vuna Hela) using Ezesha?

NO.

17.  In case of joint applications, what happens if the joint applicants’ incomes exceed Kes 350,000?

They will not be eligible. Income ceiling applies also to joint incomes.

18.  Under normal circumstances, there is no person earning a gross salary of Kes 350,000 per month who can qualify for a mortgage of Kes 15 Million. How will we address this?

This is noted. Customers of this income would qualify for loans of up to Kes 9 Million at 16% P.A maximum tenure.  Research confirms the bulk of our home loan customers fall in this income bracket with property prices and construction loans falling within this range.

19.  What if the customer’s ability to pay restricts him/her from qualifying for an amount less than the 105% financing?

Any application above 90% will fall under Ezesha as long as customer has ability to pay and pays the premium. It’s our duty to however inform and confirm with the customer whether he/she has sufficient savings to finance the closing costs.

20.  What if Stamp duty is only 2% as is the case in areas outside a Municipality? What happens to the other 3%?

The surplus funds can apply towards legal fees, valuations and other costs necessary to enable ownership of the owner occupied property.

21.  Under Ezesha, can HF finance for valuation?

Yes as long as it fits within the 15% of property value. Customer is free to choose the closing costs that HF can finance.

22.  Can customers with existing schemes take this cover?

Yes as long as they are not in breach of the terms of the scheme.

23.  Will HF finance the commitment fees?

No.

24.  If there are enough funds remaining under Ezesha can they be used to finance the Initial Mortgage Repayment (IMR)?

No. Ezesha will finance all the costs necessary to enable acquisition or construction of owner occupied property.

25.  Are there penalties for early redemption?

No. In fact, there are new laws with guidelines on how to deal with early redemption. The customer is allowed by law to give a one-month notice otherwise they are required to pay one month’s interest.

26.  What if the customer cannot be able to raise the annual Ezesha as well?

HF will offer insurance premium financing as a solution to this challenge.

27.  Is the product restricted to specific counties?

No. The product is available to all customers countrywide.

28.  Will the normal insurance covers such as life and fire insurances apply to Ezesha?

Yes. These insurances will still be applicable.

29.  Is there any other product that provides the same benefit?

Yes. Home Freedom is a pension backed home loan available to customers on a pension savings plan with a registered pension fund where these savings are used to secure an increased loan amount of up to 115% to facilitate acquisition or construction of owner occupied property.

30.  Can our customers do top-ups if the property value increases?

Yes. But within the LTV covered by property value.

31.  Since the product targets purchase and construction loans, what are we going to handle construction loans since the LTV stands at 85% due to the risks involved in the implementation of  a project?

Ezesha mitigates the high LTV risk using the insurance cover. Project implementation risks are better isolated and mitigated through our project credit appraisal and administration.

32.  Are plot loan covered under Ezesha?

No.

33.  For most schemes the LTV stands at 90%, how are we going to handle such cases?

Scheme terms as signed will always apply but addendums will be negotiated to enable allow LTV limits accommodate Ezesha.

34.  Will Ezesha be able to cover the down payment and all closing costs?

CRI will definitely cover the down payment. However, in most cases it will not cover all the closing costs but a substantial amount will be catered for so that the customer will only incur a small portion of the closing costs.

35.  Can contract employees of NGO’s (for instance people who sign one year Contracts and then renew them) qualify for Ezesha?

Yes.

36.  Ezesha will have many different anniversaries and therefore different days for renewal of the cover. How will these anniversaries be managed?

HF will manage prompts for anniversaries and renewals.

37.  For customer who are employed in the Diaspora, how do we finance them yet their LTV is 85% investment residential since they do not live in the financed house?

Those customers with families in Kenya but working abroad will be financed 90% of property value.

38.  Can a customer who has already paid a down payment apply for Ezesha and we refund directly to account?

Yes.

Makao Frequently Asked Questions

Makao Frequently Asked Questions

1.    Is the 1% inspection fee we will charge the customer before the site visit refundable?

No. The inspection fees are not refundable as they are used to defray costs associated with the initial inspection. The fees are paid upfront before the first site visit to ensure that HF spends its resources on serious takers.

2.    Does the 1% inspection fee cater for site visits that will be done for duration of the construction?

The 1% inspection fees should be able to cater for the rest if the site visits depending on the size of the project.

3.    Is the customer allowed to alter the Makao designs?

One of the challenges experienced in the previous Makao was the alteration of house designs without the prior knowledge of HF. The customers will be allowed to make alterations within limits in consultation with the HF & the Consortium after the site visit. However, after the customer has done the final sign-off and the project has been commissioned, no alterations will be allowed until the project is over. In exceptional cases and on a case-by-case basis the customer will be allowed to alter the designs on condition that all parties are aware, the customer deposits in an account the full amount that will cater for the extra expenses incurred as a result of alterations and that construction stops on site until all conditions resulting from the alterations are met

4.    Are the customers going to know the kind of finishes to expect of their homes?

There are 3 types of finishes found in the catalogue and the customers will be able to select the type of finish they would like.

5.    What happens if we prequalify someone and then after appraisal, we establish that they do not qualify for the amount they have applied for?

The customer will have to advised accordingly and the process will have start again to establish a house type that is within the amount they qualify for.

6.    Will the buy-plot-build be applicable for Makao?

One of the key assumptions for Makao is that the customer already has land with a clean title deed. In a situation where the customer wants a buy-plot-build under Makao, it is advisable that they start by purchasing a plot first and then taking up Makao later.

7.    What terms will be applied to customers under existing scheme?

The existing scheme rules will apply. However, the 1% inspection fees will still be applicable as well as the 1% of the commitment fee which is used during the construction period.

8.    What will be the price range for the various house types?

The current price ranges from Kshs 1.6 million to Kshs 27 million.

9.    Can we allow a customer to come with their own designs and use one of the consortium to implement the project on their behalf?

No. The customer will be advised to take up a construction loan.

Other Questions on Makao

10.  At what point will the current account and Makao savings account be opened?

The accounts will be opened before the site visit to facilitate the depositing of the inspection fees and the regular savings.

11.  Will Makao be done on labour-based or fixed contract?

In the reviewed Makao, HF will deal with the consortia and not the contractor as was the case previously. Therefore whether the project will be done through fixed contract or labour based is up to the consortia to decide.

12.  How are the current account and the Makao savings account related?

The current account will be instrumental in facilitating the customer’s regular transactions. The customer will be required to do regular internal transfers from their current accounts to the Makao savings account.

13.  How does the 100% financing under Makao relate to other products such Ezesha’s 105% or Home Freedom’s 115%?

Depending on the customer’s qualification and ability to pay, the customer can opt for any of the other products such as Ezesha and Home Freedom. This will offer the customer opportunities to cater for any other costs associated with their home such as furnishing the house.

14.  How can we ensure that the customer deposits a minimum of Kes 500 in the Makao account?

The customer can set up a free standing order to their Makao saving account. The Makao savings account will also serve as a motivation for those customers who do not qualify for Makao immediately but are keen on the product in the future.

15.  Will the Makao savings account be used for the drawdowns?

The Makao savings account allows for only quarterly withdrawals and hence it is not ideal for drawdowns.

16.  What if the customer is already a Crossover account holder, will (s)he have to open a Makao account?

No. It will not be necessary for the customer to open a Makao savings account.

17.  Why should a customer open both a Current account and Makao savings account?

The reviewed Makao product has a deposit mobilization objective and therefore it is important that the customer opens both accounts for transactional capabilities and for savings.

18.  Does the customer have to complete two (2) account opening forms to open both the Current and Makao savings accounts?

The same account opening form can be used to open both accounts.

19.  Will the subsequent incremental house designs be done by the same consortium that designed them?

Yes. The consortium that designed the house type will be best placed to execute the incremental house design.

20.  Will the Project Administration team at HF be able to handle the volumes once the product uptake increases?

The capacity in project administration is being enhanced and there are plans to increase their mobility so that they are able to visit several sites in a day.

21.  Can a customer finance part of the construction through cash and part through HF financing?

Yes, this is possible.

22.  What will the terms be like for a customer who opts to secure the facility through cash cover?

The existing cash cover policy applies. Currently, HF puts a margin of 5% above the interest rate we are offering the customer.

23.  Can HF be able to settle the statutory costs on behalf the customer?

It is possible to build in this into a facility especially if the customer has the ability to qualify for Ezesha or Home Freedom which finance more than 100% of the construction cost.

24.  What happens if competition buys out the mortgage facility after HF has completed the building through Makao?

We will strive to maintain the customers within our books through good relationship management and offering competitive interest rates

25.  Will there be a Good Payer’s Discount for Makao?

Yes it will once the construction loan is converted to a long-term loan.

26.  For cash Makao, why can’t we charge a one-off fee of 11% instead of separating the inspection fees (1%) and project administration fees (10%)?

We cannot charge one fee because the fees serve different purposes and have to be paid at different times in the process. The inspection fees is required before the first site visit and once we established the correct house type for the customer and we are ready to implement, the customer will be required to pay the project administration fees.

27.  Are we going to offer mortgage facilities in foreign currency especially for Kenyans in the Diaspora?

This is possible since we offer foreign currency denominated loans. However, it is important to note that the foreign currency conversion rate will be based on the prevailing market rates.

28.  Are we able to state the prices for the house types in the catalogue in foreign currency?

The estimated pricing for the house types is in Kenya shillings since most of the transactions concerning the project will be in Kenya shillings. The pricing can be stated in Kenya shillings but the customer needs to be made aware of currency fluctuations that may affect the final pricing.

29.  How regularly will the house designs be reviewed?

This shall be done annually

30.  Will we charge interest for funds disbursed during the construction period?

Yes.

31.  Will the customer be required to raise other professional fees in Makao?

The price estimates found in the catalogue include the professional fees and this is a good selling proposition in that the customer should not expect to raise any other funds once we settle on the cost of the project.

32.  What happens if the area the customer wants to build the home is controlled development?

This and other details about the site shall be established during the site visit and the customer will be advised accordingly.

33.  Under Makao, will there be restrictions on lending to customer to put up building outside a municipality?

The existing policy will apply.

34.  Can a customer offer an alternative security to secure the construction of a Makao project?

Yes. The customer can be advised to take our equity release product dubbed Vuna hela and use the funds for Makao.

35.  Can Makao cater for stalled projects?

No. The most ideal solution for the customer in this case is our construction loan.

36.  Are the usual insurances going to be applicable for Makao?

Yes they will.

37.  In case a prequalified customer has a encounters a situation where their loan is declined, can we lend for the amount (s)he qualifies for?

Yes we can but the customer will be required to raise the difference and deposit it in the current account.

38.  What happens if the customer is not happy with their Makao home?

The reason for this will need to be established to come up with a reasonable solution. However, we shall strive avoid such situations through proper relationship management 

39.  Can a customer take Makao for residential investment purposes?

Yes. Some of the house types include apartments which are ideal for residential investment.

40.  How will we allocate the various projects among the consortia?

It will be competitive. The consortium whose designs are popular with the customers will stand to gain.

41.  Which fees will be applicable when a customer takes a hybrid of Cash Makao and Makao loan?

The fees for cash Makao are applicable for customers who are funding the entire project by cash. The Makao loan terms and conditions will be applicable for any person who does a combination of both.