Borrowers enter era of costly loans as bank raises rate
The CBK action end of May was prompted by the weakening shilling against the dollar and high inflation. File
The I$M Bank has raised its lending by 1.5 per cent to reflect an increase in lending rates by the Central Bank.
This makes I$M Bank the second industry player to increase the cost of credit in the country with other players expected to follow suit as the CBK tightens its monetary policy.
“We have increased our deposit rates and the CBR has also gone up. We expect the whole sector to follow suit,” said Suprio Sungupta manager marketing department at the bank.
The revision puts the lending rate above the industry average of 13.92 per cent according to the Central Bank of Kenya.
Commercial Bank of Africa revised their rates one week ago by the same margin to 14.5 per cent.
The monetary policy committee of the CBK in its end of May policy changes continued with monetary tightening stance increasing both the CBR the proportion of deposits that banks hold with the regulator by a quarter percentage points.
Mr Sengupta said that the Treasury bill rates have increased substantially in the last few weeks as CBK sought to mop up liquidity from the market meaning that the market conditions support higher lending rates.
He said the expansionary budget presented by the minister of Finance Uhuru Kenyatta is expected to increase demand for foreign currency putting pressure on the local currency helping increase imported inflation at a time when the Shilling is trading at a record low.
Analysts at Renaissance Capital said last week that they expect the CBK to hike rates by a huge 50 basis points in the last half of the year to curb inflation.
“Faced with pressure on the currency, high inflation and a wide budget deficit, the central bank may be forced to take more dramatic measures” said the firm in an e-mail statement.
He said that this being among the key source of money to banks, players will have to increase rates now or else pass on the costs through other avenues such as fees and commissions.
The initiative by the CBK to tighten its monetary policy by hiking rates was taking long to materialise as banks had not responded to the move.
This had left the shilling supply high pushing down the price of the currency against the dollar.
“The individual banks would therefore need to make strategic decisions on the way forward by either increasing lending rate to protect the margin or maintain existing rates in pursuit of market share,” the industry lobby Kenya Bankers Association CEO Habil Olaka earlier told the Business Daily.
The regulator raised the rate to six per cent from 5.75 per cent in March and followed it up with a 0.25 basis points increase at the end of May to settle at the current 6.25 per cent.
The 91-day Treasury Bill last week traded at 9.02 per cent marking a significant difference as compared to the CBR rates at 6.25 per cent that had fuelled arbitrage where commercial banks are borrowing at low rates to invest in Treasury bills.
Average deposit rates have remained almost the static increasing from 3.43 to 3.47 in the past six months according to CBK, meaning that banks will get a higher margin in returns if they don’t increase their deposit rates as they hike borrowing costs.
“There is usually a lag time before banks can respond,” said Mr Sungupta
There is expectation for the interest rates to rise across the industry due to CBK actions, which have been prompted by a weakening shilling and high inflationary pressure. Inflation has 187 per cent in the last six months to 12.95 per cent.
The shilling has weakened by 13 per cent in the past six months and ten per cent in the last three months increasing the cost of imported goods adding to inflation figures.
The cost of food imports, and fuel is currently high, analysts say the whole of this year will be characterised by a weak local currency.
The CBK action end of May changed the cash reserve ratio for the first time since September 2009, when it was reduced to 4.5 from five per cent to allow flow of credit to the economy then suffering from the triple effects of the global economic crisis, spill-over of the post-election violence and drought.
