Barclays Bank of Kenya has raised the cost of loans beginning next month, becoming the first lender to react to the Central Bank’s increase of the benchmark Kenya Banks’ Reference Rate (KBRR).
Mid-tier lender Commercial Bank of Africa has also notified its customers of the interest rate rise, signalling an increase of its cost of lending.
Other banks are expected to follow suit, in tandem with the Central Bank of Kenya’s goal of mopping up cash in the economy to tame inflation and support the shilling.
The Monetary Policy Committee (MPC) on Tuesday revised the KBRR —the base price for loans— to 9.87 per cent from the previous 8.54 per cent.
This automatically paves the way for banks to add their risk premium, dubbed “K”, based on the higher rate.
“Dear customer, as a result of the increase in KBRR, effective 8th August, your monthly repayment will increase,” Barclays said in a notice to its customers. It did not specify its new base lending rate, which is however assumed to be the new KBRR.
Interest rates on new and existing loans are now expected to rise by at least 1.33 percentage points, with the industry’s average currently standing at 15.5 per cent.
The KBRR, a credit pricing tool that the CBK introduced last year, is the average of the Central Bank Rate (CBR) and a two-month weighted average of the 91-day T-Bill.
It is expected to be in force for the next six months unless new market developments force the MPC to review the rate earlier than the scheduled date of January 2016.
Higher interest rates will be painful for borrowers, but are expected to boost banks’ earnings this year as it did in the previous tightening cycle in 2011.
It also runs the risk of increasing the level of bad debts, but most lenders have disclosed minimal increases in defaults in recent higher interest rate phases.
The Kenya Bankers’ Association (KBA) chief executive Habil Olaka said lenders will only revise the KBBR, leaving the risk premium “K” untouched.
“The change is in the KBRR. The K remains the same,” Mr Olaka told the Business Daily.
On that basis, the interest increase should match the jump in the KBRR at 1.33 percentage points. The higher overall rate and/or longer repayment period could however see banks raise their premium charges on borrowers perceived as riskier.
Mr Olaka said banks officially received notice of the new KBRR on Thursday and have a month to raise their interest rates after notifying borrowers.
Banks can implement the higher rates by raising the monthly repayment amounts. They can also opt to extend the loan term to save borrowers from an immediate jump in their monthly repayments.
The interest hike means banks will earn more from existing loans, with the profitability rising with the size of the total loan book.
Big banks have traditionally benefited the most from a jump in interest rate based on their larger loan portfolios.
KCB, for instance, posted a 53 per cent jump in net profit to Sh10.9 billion in 2011 largely due to higher interest rates in the fourth quarter of that year.
The bank made Sh4.5 billion or 41.4 per cent of the profit in the last three months of 2011 when interest rates jumped from 18 per cent to above 25 per cent as CBK acted to rein in inflation and support the shilling.
Lenders will, however, be betting that the higher rates do not result in a significant increase in bad debts.
Standard Chartered Bank Kenya has been one of the hardest hit by non-performing loans that rose from Sh3.8 billion in 2013 to Sh10.7 billion last year.
By raising interest rates, the CBK intends to tighten liquidity and ultimately slow down inflation and support the shilling that weakened to new lows of 100 units to the dollar this week.
“The committee noted the elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months,” reads part of a statement from the MPC.
“In view of these developments, the emerging risks, and the consequent need to anchor inflationary expectations, the MPC decided to raise the CBR from 10 per cent to 11.5 per cent.”
Year-on-year inflation hit a 10-month high of 7.03 per cent last month, largely driven by higher food prices as a result of supply shortfalls owing to inadequate rainfall.
More expensive credit is expected to reduce investments and consumption, effectively strengthening the shilling and easing the cost of living.