More pain for borrowers as big banks pass on interest rate hike

Federation of Kenya Employers President Dr Habil Olaka with Jacqueline Mugo, Executive Director & CEO during a past press briefing on the high cost of living and doing business. [File, Standard]

Banks have started steeply increasing the cost of loans, with projections that interest rates could reach unprecedented levels of nearly 30 per cent, a record rate last witnessed two decades ago.

This is expected to leave borrowers with a massive debt servicing burden 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). The banking regulator on Tuesday raised its benchmark lending rate by a significant 200 basis points to 12.50 per cent from the previous 10.50 per cent.

The rate - the highest in a decade and near levels last witnessed in 2012 during the Kibaki era - is in a bid to stabilise the flagging shilling and rein in the runaway cost of living.

There are mounting concerns that the resulting higher interest rates on bank loans could lower consumer and business demand for fresh borrowings. The higher rates could also trigger a fresh wave of bad loans, starting with an immediate spike in the fourth quarter as frailer borrowers begin defaulting owing to the higher rates.

Our spot check showed several banks have been writing to their customers, explaining the change under the new terms.

Kenya’s largest bank by customer base Equity Bank became the first lender to publicly issue such a notice yesterday to its customers to communicate the changes.

“Following the adjustment of the Central Bank Rate from 10.5 per cent to 12.50 per cent, Equity Bank wishes to inform our customers and the general public that the bank shall effective 11 December 2023, adjust Equity Bank Reference Rate of 14.69 per cent to 17.56 per cent,” said Equity Bank.

The giant lender said the adjustment will apply to all existing and new Kenya Shilling-denominated loans.

“We shall continue to assess the market and advise accordingly in case of any further changes,” said Equity.

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

The Standard on Sunday could not immediately reach Equity Bank for a comment on this article. Equity said it had “endeavoured to cushion” its “members by maintaining the prevailing interest rates despite” challenges including increased costs of doing business.

Equity’s proposed Base Rate of 17.56 per cent to its customers, therefore, means the effective lending rate after loading their risk premiums will be above 26 per cent. “Consequently the final Interest Rate shall be Equity Bank’s Reference Rate (17.56 per cent) plus a margin (currently at a maximum of 8.5 per cent per annum,” said the lender.

The CBK said its unexpected increase in the key lending rate will help prevent dollar hoarding as the shilling edges towards the 155 mark against the greenback.

CBK Governor Kamau Thugge defended the hike, saying it is the best weapon to cool off the shilling in the prevailing circumstances.

“We are aware of its potential costs one being the impact it will have on growth,” said Thugge during a post-monetary policy committee briefing with journalists on Wednesday.

The tightening of liquidity is, however, expected to hurt 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 at a time when the high cost of living is already squeezing Kenyans hard.

Commercial banks could respond to these changes by elevating their risk mitigation measures, effectively rationing out many small and unsecured borrowers, analysts said.

The sharp rise in interest rates could choke economic growth as it will lift borrowing costs and encourage cutting costs or saving over spending, investing, and hiring, experts warned. 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.

Kenya’s largest banks earlier allocated a total of Sh60 billion for loan losses so far in the past nine months due to concerns about a slowdown in the country’s economy and an increase in defaults among businesses and individual borrowers.

An analysis of the financial statements of the top commercial banks, for the nine months ending September 30, showed that most of the tier-one lenders have increased their credit loss reserves by billions of shillings in response to the uncertain economic and credit market conditions.

This accumulation of funds was happening as a majority of commercial banks now anticipate that more than half of Kenyan borrowers and traders will default on their household and business loans, as revealed by a recent survey conducted by the CBK.

The projected rise in loan defaults to 54 per cent is on the back of the worsening economic conditions in the country, and the 39 banks fear this would add stress to their overall asset quality.

As of August this year, the share of loan defaults had risen to Sh611.4 billion from Sh496.6 billion in January, according to data by the CBK, indicating a cash crunch in the economy.

This has led to property seizures for thousands of borrowers.

The increasing defaults are a reflection of the challenges faced by Kenyans in an economy that has seen numerous job losses across various sectors.

Listed firms are continuing to issue profit warnings, indicating the downturn that has constrained demand.

The Federation of Kenya Employers (FKE) has expressed serious concerns about the state of the economy.

It recently issued a warning, stating that the Kenyan economy is in a critical condition and could potentially result in widespread business closures and subsequent job losses.

“The e mployers’ view is that the changes have had an overall negative impact on cash flows and the financial positions of enterprises in various ways,” said FKE Chief Executive Jacqueline Mugo and national president Habil Olaka.