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Lenders raise interest on loans despite CBK holding key rate

Saving money concept. [Getty Images]

Kenyans looking to borrow money or servicing existing loans are bracing for tough times ahead after the country’s big banks started a fresh round of raising lending rates yesterday in response to what they term a tough economic climate.

The move will, in turn, make loans more expensive, squeezing budgets and dampening investment, analysts said.

There have been 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.

Tier-1 lenders, including NCBA and Equity Bank, have been 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 has left borrowers with a massive debt servicing burden when the high cost of living is already squeezing Kenyans hard.

Yesterday, NCBA Bank, one of the top five lenders in the country, revised its base lending rates upwards.

NCBA’s proposed Base Rate of 17.50 per cent to its customers, meaning the effective lending rate after loading their risk premiums could even cross the 30 per cent mark.

NCBA’s move could see borrowers charged 17.50 per cent on top of the Base Lending Rate, an increase from 16.50 per annum for loans taken in Kenya shillings while those transacting in US dollars will pay an interest of 11.75 per cent per annum in the base rate, up from 11 per cent previously.

In a statement, the bank, however, said the changes would not have any effect on fixed-rate loan facilities.

But for variable loan facilities priced off NCBA’s base lending rate, there would be an increase by one per cent for transactions in Kenya shillings and by 0.75 per cent for US dollar-based loans effective May 21.

The new rates will take effect immediately for new loan facilities, it added.

The increase comes despite the Central Bank of Kenya (CBK) retaining its interest rate at 13 per cent in the latest review by the Monetary Policy Committee (MPC) earlier this month.

“Dear Customer, in view of the ongoing changes in the macroeconomic environment, we wish to inform you that NCBA Bank Kenya’s Base Lending Rates will change,” said NCBA in a notice to shareholders.

Borrowers had believed they had got some reprieve after the CBK retained its benchmark signal rate at 13.00 per cent following MPC’s meeting.

The lenders have been taking a cue from the banking regulator’s recent jumbo raise of the key lending rate to hike their rates.

Kenya’s biggest banks collectively incurred a record jump in bad loans last year amid concerns over rising defaults due to an economic slowdown. The rising defaults could force banks to cut back on lending to the productive sectors of the economy.

Analysis of financial statements of the top nine banks for the full year ended December reveals that gross non-performing loans rose by Sh25 billion to Sh556.9 billion from Sh531.34 billion in the same period the prior year.

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