Difficult times ahead for consumers in Kenya as banks raise interest rates
What you need to know:
It all started with a 150 basis point rise in April to cushion the shilling. Six months later, and 300 basis points higher, the shilling had steadied but the effects of saving it is now threatening to bring down consumers.
This is after several banks hiked their lending rates in an effort to protect their profit margins.
Both the Treasury and Central Bank appear helpless, with little room for immediate policy manoeuvres to help the trapped consumers. Previously, the Kenya Bankers Reference Rate (KBRR) was touted as a tool that would limit such steep increases but this seems to have failed.
It all started with a 150 basis point rise in April to cushion the shilling. Six months later, and 300 basis points higher, the shilling had steadied but the effects of saving it is now threatening to bring down consumers.
This is after several banks hiked their lending rates in an effort to protect their profit margins. The rates have gone up by as high as 12 per cent for some clients, setting them up for default, repossession and foreclosures for those with mortgage facilities. The ghost of the high interest rates of 2011 is back.
Moses, a customer with Barclays Bank, has already received a notification informing him of a rise in the rates on both his credit card facility and personal loans.
“I received the first notification on my $20,000 loan in July. Last week I got another notification on both my loan and now the credit card facility. My loans officer has informed me that the rates are now pegged at 24.5 per cent. I will be paying an extra $100 every month on top of my current premium, translating into an extra payment of $4,000 once I am done with my loan. This is not the kind of news you would want to receive,” said Moses.
Florence, a publishing executive, has also received an email from Standard Chartered Bank informing her of changes in her interest rates from 17.5 per cent to 27 per cent effective November 19.
In the email, the bank said the changes are due to the prevailing challenging economic conditions and subsequent tightening of monetary policy by the Central Bank of Kenya.
Florence laments that the change will affect her earnings and knock her off the mortgage facility that she is three months into servicing.
“I am at loss. I either have to buy out the loan, or give up on my mortgage. It’s very painful to be lumped with a more than six per cent interest increase on a month’s notice. It’s not like I have had an increase in income,” she said.
Last week, a Nairobi-based Chinese developer had his overdraft facility of $10 million reduced by half, and his $30 million loan negotiations on a new project put on hold after the bank informed him of its intention to use a new interest rate of 28 per cent instead of the earlier 19 per cent for the housing project.
This is the dilemma facing customers as banks adjust their lending rates. The respective banks have already notified their clients about an impending increase in the rates next month, in line with the new banking regulations that require them to issue a month’s notice to clients before effecting any increase. The banks are justifying the increase because of the doubling of the cost at which the government is borrowing from the local market.
Both the Treasury and Central Bank appear helpless, with little room for immediate policy manoeuvres to help the trapped consumers. Previously, the Kenya Bankers Reference Rate (KBRR) was touted as a tool that would limit such steep increases but this seems to have failed.
Unfair hike
Treasury Cabinet Secretary Henry Rotich said banks should not punish consumers with what he termed as “unfair hikes” in rates.
“From the market dynamics, the banks’ move to substantially hike the rates isn’t justified. Even with the rates averaging 15 per cent, these banks will still make handsome margins,” said Mr Rotich.
Central Bank Governor Patrick Njoroge also lamented the hike, saying that it wasn’t in line with the changes in the Central Bank Rate.
“We have seen the market respond by hiking their interests more than the 300 basis points we raised the CBR by. We are working on a mechanism that will engineer all the interest rates down gradually. We don’t want to create a shock in the market with a sudden slash,” said Dr Njoroge.
Analysts are warning that those who have taken bank loans are likely to suffer the most as the banks adjust loan products to retain their margins.
