Borrowers brace for costly loans from commercial banks

From next month, bank customers will face higher loan charges and mortgage repayments will also increase as CBK raises its base lending rate to tame weakening shilling. [PHOTO: FILE/STANDARD]

The decision by Central Bank of Kenya’s top policy organ, the Monetary Policy Committee (MPC) to schedule another meeting for August 5, 2015 must have sent a chill down the spine of many individual households struggling to service their loans from commercial banks.

Not spared from financial anguish are developers who rely on money from banks to put up real estate properties, manufacturers who survive on overdrafts to meet customer demands and farmers who need to purchase inputs such as fertiliser and pesticides.

Also hard hit is the cash strapped worker, who has no collateral and has to depend on unsecured loan facilities, using tattered salary slip as the only security, to access credit from banks.

The rise in the benchmark rate has the effect of raising the cost of funds for commercial banks, who are expected to pass it on to borrowers in the form of higher lending rates.

For those with fixed rate loan facility, banks are increasing the repayment period to compensate for the KBRR hike. “Dear customer, as a result of the KBRR increase, effective August 8, 2015, your loan repayment period will increase,” reads a text message sent out to a client by a leading commercial bank.

Apart from increasing the repayment period for those customers with loans priced at a fixed interest rate, any new loans are expected to be more expensive as commercial banks adjust upwards their prices.

During its July 7, 2015 MPC meeting, the CBK decided to raise the Central Bank Rate (CBK)-the rate at which it lends to commercial banks- from 10 per cent to 11.5 per cent.

In view of this development, the CBK also revised the Kenya Bankers Reference Rate- a tool that banks use to price their loans to customers- from 8.54 per cent to 9.87 per cent. This level of the KBRR become effective from July 7, 2015 and is what banks use to price any new loans to customers.

“The Kenya Bankers Reference Rate (KBRR) is entirely out of control of the bank but when it moves up or down, the banks adjusts accordingly any floating rate facility, including a mortgage. Banks customers affected by the recent adjustments are already being notified by their banks,” said Habil Olaka-CEO Kenya Bankers Association (KBA).

In coming months, borrowers will even pay more. “Customers will start paying higher rates for loans by the 133 basis points increased on KBRR, now that under the KBRR regime, the KBRR rate is the base. With a higher CBR, banks are likely to increase the premiums charged (k) to reflect the market conditions,” said Faith Waitherero, an analyst at Standard Investment Bank (SIB).

Overall, bank customers will face higher loan charges and mortgage repayments will also increase. These rates are expected to remain high until the next revision of KBRR.

Mortgage loan

On mortgages, uptake of new housing units will be severely affected by rising costs and expensive mortgage loans, cutting off many individuals and households from the mortgage business.

Data from the CBK shows that based on the KBRR framework, Paramount Universal Bank Limited offers the cheapest consumer loan that has less than two years maturity, followed by Bank of India, African Banking Corporation Limited, Bank of India and Dubai Bank in that order. This data was collected as at March 31, 2015.

In terms of business loans secured using property, K Rep Bank is the most expensive lender for a firm seeking an overdraft facility. It is followed by Standard Chartered Bank (SCB) Kenya Limited and then Jamii Bora Bank Limited.

The most expensive personal residential mortgage loan is from Consolidated Bank followed closely by Gulf African Bank Limited.