Banks react to Central Bank Rate increase with loan hikes

CBK Governor Kamau Thugge when he appeared before the Senate Finance and Budget Committee at Parliament on December 4, 2023. [Boniface Okendo, Standard]

Banks have started steeply increasing the cost of loans, with projections that interest rates could cross unprecedented levels of above 30 per cent, a record rate last witnessed two decades ago.

This is expected to leave borrowers with a massive debt servicing burden when the high cost of living is already squeezing Kenyans hard.

The lenders are taking a cue from the recent jumbo raise of the key lending rate by the banking regulator, the Central Bank of Kenya (CBK).

The banking regulator early this month raised its benchmark lending rate by 50 basis points to 13.00 per cent from the previous 12.50 per cent to tame sticky inflation.

“The MPC, therefore, decided to raise the Central Bank Rate (CBR) from 12.50 per cent to 13.00 per cent,” said CBK governor Dr Kamau Thugge.

The rate - the highest in a decade and near levels last witnessed in 2012 during the Kibaki era - was in a bid to stabilise the flagging shilling which has since gained and steadied and rein in the runaway cost of living, said Dr Thugge.

But now there are mounting concerns that the resulting higher interest rates on bank loans could lower consumer and business demand for fresh borrowings. The higher rates could also trigger a fresh wave of bad loans, starting with an immediate spike in the fourth quarter as frailer borrowers begin defaulting owing to the higher rates. Our spot check yesterday showed banks have started writing to their customers explaining the change under the new terms.

Kenya’s largest bank by customer base Equity Bank became the first lender to publicly issue such a notice yesterday to its customers.

“Following the adjustment of the Central Bank Rate (CBR) from 10.5 per cent to 12.5 per cent in December 2023 and from 12.5 per cent to 13 per cent in February 2024, Equity Bank wishes to notify our customers and the general public, that the Bank shall, effective 20th February 2024, adjust Equity Bank’s Reference Rate (EBRR) from the current 17.56 per cent to 18.24 per cent,” said Equity Bank in a public notice.

Equity’s proposed Base Rate of 18.24 per cent to its customers, therefore, means the effective lending rate after loading their risk premiums will be above 26 per cent and near the 30 per cent mark. “Consequently, the final Interest Rate shall be Equity Bank’s Reference Rate (18.24 per cent) plus a Margin (currently at a maximum of 8.5 per cent) per annum,” it said.

The giant lender said the adjustment will apply to all existing and new Kenya shilling-denominated loans. “We shall continue to assess the market and advise accordingly in case of any further changes,” said Equity Bank.

More lenders are expected to follow suit in the coming days, The Standard has learnt.