Banks Adopt Annual Percentage Rate Calculation Method for Consumer Loans

Commercial banks in Kenya have begun the pilot implementation of the Annual Percentage Rate (APR) pricing mechanism, which will enable consumers to compare different bank loan costs based on standardized parameters and a common computation model.

In addition to conducting training of bank employees, including loan officers, banks are currently modifying their systems and loan application procedures in readiness for the industry’s adoption of the APR disclosure requirement. APR is one of the industry interventions spearheaded by the Kenya Bankers Association (KBA) in collaboration with the Central Bank of Kenya.

"As an industry, we are enhancing pricing disclosures in order to enable bank customers to make more informed choices. This is one of the mechanisms embraced by banks to address issues relating to easing access to credit," said Habil Olaka, the Chief Executive Officer of KBA.

Mr. Olaka added that the APR mechanism promotes pricing transparency and therefore would not only stimulate competitive loan interest rates; but would also promote consumer protection by standardizing disclosures during the loan application process.

Currently, banks are required to provide loan applicants with a breakdown of the Total Cost of Credit (i.e. bank charges and third-party costs associated with the loan facility); and a Loan Repayment Schedule in line with the Central Bank Prudential Guidelines.

With the APR in place effective 1 July 2014, banks will disclose the total costs associated with the loan; the loan repayment schedule; and the APR, which takes into account the interest rate component; bank charges and fees; and third party costs, including legal fees, insurance costs, valuation fees, and government levies.

KBA developed the APR framework following industry consultations during the course of 2013 and First Quarter 2014, and with technical support provided by Financial Sector Deepening (FSD) Kenya.

For more information, kindly contact Ms. Nuru Mugambi, Director of Communications and Public Affairs, Kenya Bankers Association, Phone: +254-20-2221704/2224014 or Email: nmugambi@kba.co.ke.