Blow as cost of credit rises to 17-month high

Revellers at a bar in Nairobi following the lifting of the night-time curfew last month. [Wilberforce Okwiri, Standard]

The cost of credit has risen to a 17-month high, with banks charging an average of 12.12 per cent interest on loans in August, data from the Central Bank of Kenya (CBK) shows.

This is the highest lending rate since February last year when borrowers paid banks an average of 12.19 per cent.

This comes at a time when the economy is experiencing inflationary pressure as businesses reopen.

Part of the economy had been shut down by the stringent containment measures aimed at curbing the spread of Covid-19, a situation that saw massive job losses.

An analysis of interest rates on a website run by Kenya Bankers Association (KBA) by our sister publication Financial Standard found out that banks charged an average of 13.07 per cent for a Sh1 million personal secured loan repayable in 12 months. With the onset of Covid-19, the cost of credit went down after CBK reduced its benchmark lending rate to seven per cent.

The cash reserve ratio, the percentage of cash required to be kept in reserves against the bank’s total deposit, also reduced from 5.25 per cent to 4.25 per cent, freeing up additional funds for lenders to extend to borrowers.

The cost of credit is going up at a time when the private sector is expected to lift the economy, a feat that can only be achieved by businesses - particularly small businesses - accessing cheap loans.

As part of the government’s plan to ensure micro, small and medium enterprises (MSMEs) access credit, President Uhuru directed relevant authorities to effect a moratorium on listing at Credit Reference Bureaus (CRBs) for loans of less than Sh5 million. The one-year moratorium will end in September next year.

Borrowers with loans below Sh5 million listed with CRBs from October last year to date will also not have the listing incorporated in their credit reports.

MSMEs with thin balance sheets were the hardest hit by the Covid-19 Pandemic. As one of the emergency measures, CBK announced the suspension of the listing with CRBs of borrowers whose loans were non-performing before March 13 last year.