Costlier loans set in as more banks raise rates

Customers will start paying higher to service their loans after banks started raising interest rates in line with the regulatory benchmark rate which is now at its highest level in seven years.

Equity Bank and NCBA have become the first lenders to formally inform their customers about the upward review of interest rates on loans citing the rise in the Central Bank of Kenya (CBK) benchmark rate.

More banks are expected to follow suit given that Kenya dropped interest rate caps in favor of a risk-based pricing regime where different consumers are charged different interest rates based on their risk profiles.

Equity said in a Thursday notice to its customers it will from Monday next week adjust its own benchmark rate to 14.69 percent plus a margin determined based on each customer’s risk profile, up from 12.5 percent in January.

NCBA followed suit yesterday, informing customers that it will, effective August 7, raise its benchmark rate for Kenyan shilling-denominated loans to 13 percent. This is from the 12 percent that has been in place since May 29, 2023.

“In view of the recent increase in the Kenya CBR, we wish to advise that we will adjust our Kenya Shilling base lending Rate to 13 percent per annum effective 7th August 2023," said NCBA in messages to customers.

The June review is the fifth in about 12 months and borrowers are holding breath that another monetary policy committee meeting set for the end of this month will not deliver another rise in CBR.

Many borrowers are already battling with the high cost of living that has remained above the government's targeted range of between 2.5 percent and 7.5 percent for over 12 consecutive months, cutting disposable income.

Salaried workers have for instance endured inflation-adjusted pay cuts for three straight years to 2022 and this looks set to continue this year given many employers have frozen pay rises.

Widespread adoption of risk-based lending has been raising the cost of credit for most borrowers but it has helped incentivise banks to lend more as the increased returns cover the risk of default by some customers.

Bank loans were in March this year averaging between nine percent and 17.6 percent compared with nine percent and 14.3 percent in March last year.

Borrowers have hit banks with an additional Sh82.9 billion in loan defaults in just four months of the year, signaling the economic struggles that have seen the share of non-performing loans hit a 16-year high.

CBK data shows the non-performing loans (NPLs) ratio— the proportion of loans for which no interest or principal has been received for at least three months—hit 14.9 percent in May from 13.3 percent in December, as the stock of bad loans piled.

The stock of bad loans has risen from Sh487.7 billion in December to close April at Sh570.6 billion, with the worsening of the NPLs ratio in May pointing to a further rise in non-payments.

At 14.9 percent, the latest NPL ratio is only rivaled by the 15.04 percent that the banking sector posted 16 years ago in June 2007 when the gross loan book stood at Sh470 billion and gross defaults were Sh70.7 billion.