Costlier loans for borrowers as banks increase interest rates

Concept of lending by commercial banks to companies and individuals. [iStockphoto]

Kenyan banks have started increasing interest rates following the Central Bank of Kenya's (CBK) move to raise its benchmark lending rate.

Standard Chartered Bank is the latest bank to increase its base lending rate, as banks begin to react to the increase in the Central Bank Rate (CBR) from seven per cent to 8.25 per cent.

"Dear client, the Standard Chartered Bank internal base lending rate will be revised upwards from 8.5 per cent to 9.25 per cent effective November 14, 2022. This adjustment will affect your KES loan facilities held with us," read a message from Standard Chartered to its clients.

Earlier, NCBA Bank had also sent communications to its clients informing them of its decision to review its base lending rate from 8.9 per cent to 10 per cent per annum for the Shillings-denominated credit facilities.

The base lending rate for the dollar-denominated credit facilities will increase from eight per cent per annum to nine per cent per annum, NCBA told its customers.

"In line with the increase in the Kenya Central Bank Rate (CBR) from seven per cent per annum in April 2022 to the current rate of 8.25 per cent per annum and increase in the United States Federal Funds Rate from 0.25 per annum in January 2022 to the current rate of 3.25 per cent per annum, the NCBA Bank Base lending rates for both Kenya shillings and the United States dollars will be adjusted as follows," read the message from NCBA Bank.

CBK's monetary policy committee, the highest decision-making organ, increased the CBR from seven per cent to 8.25 per cent in what was aimed at fighting inflation - persistent increase in prices of goods and services in the economy.

MPC also cited the elevated global risks and their potential impact on the domestic economy, as some of the major reasons for tightening the supply of money by increasing the benchmark lending rate.

This is the highest CBR since January 2020 and comes at a time when the country is grappling with a spike in prices of goods and services as well as a weakening shilling.

CBR is the rate at which banks borrow from the CBK before on-lending to consumers. When the CBR goes up, banks tend to increase their interest rates on credit facilities.

The increase in interest rates comes at a time when President William Ruto moves to actualise his campaign promise of cheap credit to his support base which includes jua kali artisans, boda boda operators and mama mboga popularly known as the hustlers.

President Ruto has anchored his agenda for the next five years on making credit affordable, especially to small traders who have in the past found themselves paying more for loans.

"Affordable credit makes a huge difference in the rate of business growth," said Ruto in a speech at the opening of the 13th Parliament last month.

However, with CBK combating inflation, the President's plans for cheap credit might be delayed as the apex bank tightens the money supply by raising the rate at which it lends to banks.

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies.