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For real growth, interest should be below 10 per cent

By Martin Dias | March 31st 2016

NAIROBI: The Central Bank of Kenya (CBK) has maintained its base lending rate at 11.5 per cent since last year in an effort to bring stability to the financial sector. But most commercial banks still charge high interest rates. Currently, only 23 per cent of banks are giving out loans at an interest rate of 15 per cent (and below).

At the moment, we have 11 commercial banks charging lending rates of below 16 per cent, with the remaining 33 charge over 17 per cent. By refusing to bring down interest rates, commercial banks have made y expensive for borrowers.

Yet a small change in interest rates makes a big difference in the loan amount paid by the borrower.
It is ironical that all this is happening despite the establishment of the Kenya Banks Reference Rate (KBRR) that is supposed to help control interest rates. For a decade now, the real estate sector has been experiencing robust growth, which has encouraged the development of many real estate firms in the country. Some of these firms operate as mortgage originators, some as aggregators and still others as investors.

Most mortgage dealers compete with one another based on the interest rates, fees and service levels they offer to their consumers.

It is crucial for home buyers and anyone intending to invest in the real estate industry to note that mortgage is hugely affected by interest rates as they ultimately affect the amount one will pay for their home.

Many borrowers prefer variable mortgage rates that gives room to change or adjust their monthly installments. Other borrowers prefer fixed rate mortgages.

But a mortgage, whether at fixed or adjustable interest rates, can reduce or increase depending on the volatility of the economy.

Understanding the situation at hand helps home buyers make budget-friendly mortgage decisions; it also enables one know the right time to take up a mortgage and whether it should be fixed or adjustable.

Capital flow changes greatly affect supply and demand for property in that if capital is available, people can easily buy property. The opposite is true when capital is limited.

Homeowners are known to focus on changing mortgage rates because they have a direct impact on their monthly repayment rates.

Is there any hope? According to Riyadh Bank senior vice president and manager of market and liquidity risk management department, Mohamed Wehliye, “If the motion that was tabled before Parliament two weeks ago to put a cap on banking lending rates at four per cent above the CBK’s rate is anything to go by, little will be achieved as this then means banks will be giving out loans at 15.5 per cent, which is neither cheap nor affordable.”

More action is needed to bring down interest rates to below the ten per cent to keep the current real estate growth going.

— The writer is the CEO of FAPCL Group.

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