Fresh pain for borrowers as banks rush to raise rates, again

Interest rate increments come at a time when the high cost of living is already squeezing Kenyans hard. [iStockphoto]

Banks have started steeply increasing the cost of loans, with interest rates expected to pass the 20 per cent mark, leaving borrowers with a massive debt servicing burden, a spot check by The Standard shows.

The increments come at a time when the high cost of living is already squeezing Kenyans hard.

The lenders are taking a cue from the government’s increasing debt security sales amid concerns that the resulting higher interest rates on bank loans could lower consumer and business demand for fresh borrowings.

Our spot check showed several banks have been writing to their customers, explaining the change under the new terms.

“Dear [Customer name redacted), due to an increase in Treasury Bill rates, we have increased the Absa Base Rate (ABR) from 11 per cent to 12.5 per cent effective November 1, 2023,” said Absa in such notice to an affected customer. “Your loan tenor will be amended on your loan facilities with us under ABR.”

The Standard could not immediately reach Absa for a comment on this article. More lenders are expected to follow suit in the coming days.   

Absa’s proposed Base Rate at 12.5 per cent to the aforementioned customer, therefore, means the effective lending rate after loading their risk premiums could be well above 15 per cent.

Increased borrowing by the government is considered to be a common cause of crowding out. The borrowing can force interest rates higher and dampen loan demand by those in the private sector. Central Bank of Kenya (CBK) Governor Kamau Thugge, however, earlier said the government does not intend to make it hard for the private sector to raise money by increasing debt sales.

He cited the National Treasury’s move to cut the net domestic borrowing target by Sh270.5 billion from Sh586.5 billion to Sh316 billion in the current financial year.

“We believe that with that reduced domestic borrowing, we will see a reduction in the pressure on interest rates, and also because of the additional external financing we should be able to have more foreign exchange which will help us build our international reserves,” Dr Thugge said August during a post-Monetary Policy Committee (MPC) briefing.

His comments came amid mounting fresh concerns that heavy borrowing by the government is elbowing out some private firms who want to raise funds from commercial banks. Dr Mbui Wagacha, a former senior economic advisor to President Uhuru Kenyatta and former CBK chairman recently said the present monetary policy is enabling the government to access lending from the domestic market and not to assist the real economy.

The World Bank last month warned of fresh risks in Kenya’s domestic borrowing plan. 

In a new report, the Bretton Woods institution appeared to suggest it is important for the government to cut reliance on domestic debt, which has the inherent risks of crowding out the private sector.

This happens by limiting credit and fuelling higher interest rates, making it more expensive for companies and individuals to borrow. 

Consequently, the World Bank signalled it is imperative for countries like Kenya with huge debt profiles such as the maturing Sh292 billion Eurobond to cast their nets wider for alternative and additional sources of international financing.

“Several countries, including Angola, Ghana, and Kenya, issued Eurobonds in 2021 and early 2022, representing significant refinancing risks for large redemptions,” said the Word Bank in the report published early last month.

The National Treasury has warned the government’s headroom for more public borrowing is narrowing.