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More pain for borrowers as banks start hiking loan rates

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

Banks have started steeply increasing 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 jumbo raise of the key lending rate by the banking regulator, the Central Bank of Kenya (CBK). 

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

Kenya’s largest lender Equity Bank issued such a notice yesterday to its customers to communicate the changes. 

“Following the adjustment of the Central Bank Rate on 26 June 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 10 July 2023,” said Equity Bank. The giant lender said the adjustment will apply to all existing and new Kenya Shilling-denominated loans. 

More lenders are expected to follow suit in the coming days, The Standard has learned.  

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 standards.   

The widespread adoption of the risk-based rating of loans by a majority of the country’s nearly 40 banks had raised hopes of cheaper lending to borrowers with a good credit history. 

Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit offered or extended to a particular consumer to reflect the risk of nonpayment of their loan by that consumer. 

Information from a consumer report is often used in evaluating the risk posed by the consumer. 

Under the new regime, banks are expected to offer more favourable terms to consumers with good credit histories and less favourable terms to consumers with poor credit histories.

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