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Tough times loom for bank loan borrowers

BUSINESS
By MORRIS ARON | Aug 13th 2015 | 3 min read
By MORRIS ARON | August 13th 2015
BUSINESS

If you have a personal loan, car loan, mortgage or use a credit card, life is about to get harder as interest rates increase between now and September 1.

Financial institutions are currently increasing the cost of credit to factor in the Central Bank of Kenya’s decision in mid-July to raise two key benchmark rates that signal the direction interest rates assume.

Interest rates charged on personal loans have already gone up from an average of 12 per cent in March to current levels that are around 16 per cent. Mortgage rates are also expected to assume a similar trend at the expiry of the mandatory 30-day notice of an increase in charges.

Loan pricing

The decision by financial institutions is also expected to affect consumption levels, particularly in the retail sector, as the net take-home salary for those holding loans reduces.

Even savers are expected to be hit by a lower return on their deposits in the long term. Higher interest rates dissuade customers from applying for loans, which reduces bank incomes and, therefore, the money they pass on to their depositors.

During a July 7 Monetary Policy Committee (MPC) meeting, CBK decided to raise the Central Bank Rate (CBR) — the rate at which it lends to commercial banks — from 10 per cent to 11.5 per cent.

The bank also revised the Kenya Bankers’ Reference Rate (KBRR) — a tool that banks use to price their loans to customers — from 8.54 per cent to 9.87 per cent.

The policy committee’s decision was aimed at taming inflation by reducing money supply, and addressing volatility in the foreign exchange rate.

“When I applied for a mortgage at my bank, they said the rate, which was a special offer, would be 11.9 per cent. I was, therefore, shocked when a month later, after completing due diligence on the property I wanted to buy, I was told the interest rate is now 16 per cent,” said Matengo, a customer who asked that his full name not be revealed to avoid a fallout with his bank.

A rise in interest rates makes it more expensive for people to borrow money to pay for things such as homes and cars, leading to a drop in the demand for them. Higher interest rates can also make it more expensive for companies to borrow and invest large sums of money in projects.

As explained by Habil Olaka, the CEO of the Kenya Bankers Association: “The Kenya Bankers’ Reference Rate is entirely out of control of the bank, but when it moves up or down, the banks adjust any floating rate facility accordingly, including mortgages. Bank customers who will be affected by the adjustments have already been notified by their banks.”

Negative impact

Analysts following the trend say that while the rise in interest was expected, sudden jumps in the rates are bound to shock day-to-day economic operations in the short term, and dampen economic growth in the medium to long term.

“While MPC made the moves they made in a bid to address foreign exchange volatility and inflation, the other side of the decision is what is coming to the fore — interest rates rising rapidly within a short period of time, while foreign exchange is still volatile,” said Johnson Nderi, the corporate finance and advisory manager at ABC Capital.

“These developments will definitely have a negative impact on the economy whichever way one looks at it.”

Though CBK has not officially released its data on interest rates, it is widely expected that the latest statistics will show a change of between 3 per cent and 5 per cent in the average cost of money.

An increase is already evident in interbank rates, which have more than doubled between July 7 and yesterday.

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