Borrowers' pain mounts as more lenders raise rates

Higher interest rates ahead concept. [Getty Images]

Banks are continuing to steeply increase the cost of loans, with interest rates expected to go beyond 20 per cent, leaving borrowers with a massive debt servicing burden.

The increments come at a time when the high cost of living is already squeezing Kenyans hard.

The lenders are taking a cue from the recent increase of the key lending rate by the banking regulator, the Central Bank of Kenya (CBK).

A spot check by Financial Standard yesterday showed several banks have been writing to their customers, explaining the change under the new terms.

Tier one lender NCBA and tier three lender Access Bank became the latest lenders to hike their rates. They have consequently issued a  communication to their customers.

“In view of the recent increase in the Kenya Central Bank rate, we wish to advise that we will adjust our Kenya shilling base lending rate to 13.0 per cent p.a. effective 7th August 2023,” said NCBA last week.

Access Bank said: “Following the adjustment of the Central Bank Rate on June 26, 2023 from 9.5 per cent to 10.5 per cent, we wish to advise our customers that we shall adjust loan interest rates to reflect a revised Access Bank Base Rate of 14.63 plus a margin based on the customer’s credit risk with effect from August 8, 2023,” said Access Bank, formerly Transnational Bank. The lender added the adjustment will apply to all existing and new Kenya shilling-denominated loans.

Kenya’s largest lender Equity Bank issued such a notice a week ago to its customers communicating the changes.

“Following the adjustment of the Central Bank Rate on June 26, 2023 from 9.5 per cent to 10.5 per cent, we wish to inform our customers that we shall adjust loan interest rates to reflect a revised Equity Bank Reference Rate of 14.69 plus a margin based on the customer’s credit risk with effect from July 10, 2023,” said Equity Bank.

The giant lender also indicated the adjustment will apply to all existing and new Kenya shilling-denominated loans.

More lenders are expected to follow suit in the coming days. 

CBK last month issued the highest key lending rate hike in seven years, raising the benchmark rate by 100 basis points from 9.5 per cent to 10.50 per cent.  

“I think, as I explained, the information that the Monetary Policy Committee had when they made that decision to retain the rate of 9.5 per cent was that it looked like inflation was actually coming down, it had come down from 9.2 to 7.9 per cent. And even non-food and non-fuel inflation had also declined,” CBK Governor Kamau Thugge told reporters during his first post-Monetary Polity Committee (MPC) briefing last month. 

The increase aims to rein in the stubborn inflation, which measures the rate of rising prices and remained at 8.0 per cent in May despite CBK’s efforts to tame it. The prices of key food items have climbed significantly over the last couple of months, adding pressure on cash-starved households still reeling from the economic hit of the Covid-19 pandemic. The rate hike left borrowers staring at a big jump in their monthly loan repayments. 

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies, with borrowers set to feel the financial pain of the increased cost of loans.  

This could translate into banks tightening their lending standards.  

The sharp rise in interest rates already threatens to choke economic growth as it has lifted borrowing costs and encouraged cutting costs or saving over spending, investing, and hiring. 

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand—a recipe for a painful recession.  

At the same time, higher rates have increased borrowing costs.

This is a concern for banks because borrowers faced with elevated costs may not be able to repay and service their loans, laying the groundwork for banks to toughen their lending.