Markets & Finance

Bank lending rates shoot to highest levels in eight years

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A commercial banking hall in Nairobi. Average lending rates rose to their highest levels in eight years last month. File

Average commercial bank lending rates rose to their highest levels in eight years last month, as banks moved to shore up their profit with wider interest spreads.

Central Bank data shows that the average lending rate rose to 18.48 per cent from 13.91 per cent in June even before the regulator took to tightening the monetary regime in a bid to rein in inflation and strengthen the shilling.

It is the first time CBK’s data is reflecting the surge in lending rates, and appears to be lagging the last wave of increases in November which took the base rate for most lenders to 24 per cent.

The data also shows that the bank deposit rate average rose to a 10-year high of 5.75 per cent. The deposit rates however grew at a slower rate compared to the lending rate, resulting in a widening in the interest rate spread to 12.73 per cent from 10.38 in October.

Retail depositors continued to face marginal returns as the savings rate—the interest that banks pay customers for money left in their accounts without withdrawal restrictions--was at 1.41 per cent, lower than last year’s rates.

“The banks are in business also and have to protect their turf but they have to be careful and need to absorb some of the costs too,” said Tsavo Securities CEO Fred Mweni.

Tight liquidity, caused by CBK’s recent decision to increase the rate at which it lends to banks to 18 per cent at the beginning of the month and the rise in cash ratio (money that the banks must keep with the regulator to cover their operations) has seen banks raise their minimum lending rates to cluster at 24 per cent.

Demand for higher rates by large depositors who have been challenging banks to match the Treasury paper rates, which have risen to 18.5 per cent, has also been cited as a cause for the high lending rates.

The banks also maintain that their sources of funds are not limited to the customer deposits and that some sources were more expensive than deposits.

“A bank has mixed sources of funding whose pricing differs. Our wholesale and fixed account depositors are getting rates higher than the 10 per cent,” said Mr Jeremy Ngunze, head of Business Management at CBA in a recent interview.

Other sources include borrowing from peers in the industry, from the public through corporate bonds and from the regulator. The interbank rate which is the rate banks lend to each other rose to an 18-year-high in November to 28.9 per cent.

Banks have also said rising inflation is increasing their operational expenses, thus eating into their margins.

Inflation rate has risen for the 13th month in a row to 19.72 per cent in November, increasing the cost of funds.

The rise in interest rates has brought fears of mass loan defaults with banks stating that they will be willing to restructure loans for existing borrowers to ensure the burden they had to carry was bearable.

The Business Daily, however, found out that some of the banks had not issued guidelines on implementation of the restructuring.

KBA had announced earlier this month that extension in loan repayment instalments will be capped at 20 per cent and had promised to waive early repayment charges for customers who wished to clear their outstanding loans in one instalment.

“The measures were a meant to guide the borrower on how to approach the bank and negotiate so as to be contained based on their ability,” said KBA chief executive Habil Olaka.

The Kenya Bankers Association (KBA) had said that its members had agreed on the measures which included extension of the loan repayment period to curb possible defaults and an increase in non-performing loans in an environment of high interest rates.

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