NAIROBI: The recent sharp rise in borrowing rates has seen Kenyans caught up in an unprecedented squeeze on their incomes after banks issued them with notices informing them of an impending upward review of their loan repayments.
Funds borrowed at about 15 per cent months ago have now been re-priced at anywhere between 24 and 30 per cent. For most, that could translate to double the amount repayable every month.
The notices from banks warned: "Due to the prevailing challenging economic conditions and subsequent tightening of the monetary policy by the Central Bank of Kenya (CBK), it has become necessary for the bank to review its current pricing mechanism on our Kenya Shilling credit facilities.
"As a result, effective 19th November 2015, the margin applicable on your credit facility will be increased and the effective new rate and monthly instalment will be as indicated below. The monthly instalment is indicative as it is dependent on the outstanding loan balance," read in part some of the banks notices the borrowers shared with The Standard team.
The current storm came about after the CBK raised interest rates to stem the rapid depreciation of the local currency and avert a possible hike in the cost of living, or inflation, which is when too much money chases too few goods.
The Government — faced with revenue shortfalls and huge projects hungry for cash — has raided domestic financial markets, borrowing heavily to plug funding shortfalls. This has seen disbursements to key departments delayed, for instance, electricity supply to Parliament was cut for three days over unpaid bills early this month.
As a result, in just four weeks, the cost of short-term borrowing for the State from the bond market went up to 22.49 per cent from single-digit interest rates.
Essentially, the State is in direct competition for the money held by commercial banks with other ordinary customers (including small businesses), which flies in the face of the Government's commitment to ensure the private sector can access affordable credit.
Home buyers are among the most exposed bank customers owing to the big amounts in loans that are involved and the tenure that often extends beyond 15 years.
While the mortgage market is still at its infancy in the country, the prospect of losing a home to foreclosure- the process banks go through to forcibly sell a borrower's home to recover unpaid loans, can be very scary.
Housing Finance Managing Director Frank Ireri is sympathetic with borrowers who may run into problems servicing their home loans over the higher rates.
"It is very tough for everybody. We have funding challenges and it is not good for business. We are handling our mortgage customers differently and we do not anticipate any defaults but the challenge now is for new business," Mr Ireri said in an interview.
Past high interest regimes, especially in the 1990s, saw hundreds of families lose their homes when monthly repayments hit the sky while lending rates rose to historical levels of 84.67 per cent in July of 1993. Apart from ordinary borrowers, large corporations are also feeling the pain.
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