How to navigate through the current high interest rates tide


We are officially in a period of high-interest rates. On one hand, investors are seeking 16–18 per cent on government bonds; on the other hand, the Central Bank of Kenya (CBK) increased its benchmark lending rate to a 12-year high of 13 per cent in February.

Right on cue, commercial banks have begun notifying customers that they will, in turn, increase rates, adding pressure to businesses and households that are struggling for survival in this challenging environment.

As stated in the previous column, we are entering a turbo-charged volatile, uncertain, complex, and ambiguous (VUCA) environment, and high-interest rates are a symptom of this economic malaise.

So what to do?

While it's natural to hope for an economic turnaround, particularly with the expectation of inflation easing after the long rains, waiting passively is not a realistic strategy. Businesses must immediately go back to the drawing board and look at how the present interest rates will impact them and start planning how to soften the denting blows of high-interest rates.

If your business is servicing a loan, the first question you need to ask is whether you can comfortably service the loan. This also means looking at what will happen if revenues fall or if your customers start delaying payments. How long can you service loans if some or all of these events do happen? Do you have a safety net?

It is important to be honest and realistic in answering these questions. No one would have imagined that retail giants like Nakumatt, Tuskys, and Uchumi would collapse, but as a supplier when the frequency of post-dated cheques increased coupled with extended credit periods, it should have been a red flag.

Now imagine you are continuously borrowing commercial loans at present rates to supply a customer showing the above symptoms. It may be time to ask what will happen should my customer fail to pay. Remember, interest cost is increasing so your exposure is equally increasing.

Speak with your relationship manager to learn more about the support offered by your lender, such as debt management classes, alternate financing choices, or consulting an accountant or financial expert for advice. Work along with your financial specialists to determine whether it is feasible to continue serving this kind of client, carefully balancing the risks involved with the possible rewards.

The high-interest rate headache is not only for business owners but also employees. If your employer is struggling to pay the bank, then it is highly unlikely that you will get a pay increment, an end-of-year bonus, or the thirteenth month's pay.

Similarly, personal financial management demands that you review whether that car or home upgrade is necessary or can be delayed.

But as the apocrypha states, never let a crisis go to waste.

High market interest rates create opportunities. Asset values will dip due to reduced demand and increased supply. This is already happening if you look at the acres of pages dedicated to auctions. If you are looking to buy assets, these depressed prices present an opportunity.

Also, even in these tough times, a well-researched and feasible proposal still attracts investors without the need for costly borrowing. When faced with high-interest rates, people can look for more economical financing options such as crowdsourcing or family loans. Make sensible use of your opportunities!

The writer is a Certified Public Accountant and finance specialist