Markets

Cost of loans shoots up to 20 per cent

1&m

I&M Bank raised its minimum cost of loans to 19 per cent on Thursday, as the second wave of interest rate increases remained strong barely three months after the financiers increased their lending charges in July. File

Equitorial Commercial Bank became the first lender to raise its minimum lending rate to 20 per cent, in a week that the cost of borrowing for government surged by 2.62 percentage points to 16.52 per cent on the two-year Treasury bonds.

I&M Bank also raised its minimum cost of loans to 19 per cent on Thursday, as the second wave of interest rate increases remained strong barely three months after the financiers increased their lending charges in July.

Treasury had sought to raise Sh10 billion from the market but accepted bids worth Sh240 million, or 2.4 per cent of the offer as investors quoted an average yield rate of 20.4 per cent.

“The subscription was quite low indicating tight liquidity, which has been sucked up further by the repos in the market.

The fact that CBK accepted only Sh240 million implies that they thought the quoted rates were too high, as only 10.7 per cent of the bids received were accepted,” Poonam Vora, research analyst with Dyer and Blair Investment Bank said.

“Since there are no redemption payments to be made during the month of November, the CBK has some leeway to control the rates through its uptake, she added.

The Central Bank of Kenya (CBK) has been mopping up excess cash in the economy in a bid to rein in inflation and strengthen the shilling. Last month, it raised the Central Bank Rate (CBR) —the cost at which it lends to commercial banks— by four percentage points to 11 per cent.

The Monetary Policy Committee (MPC)—the decision making arm of CBK— is set to meet on Tuesday to assess effectiveness of the rate increase.

The low subscription rate for Treasury securities could see MPC hold the rate steady while the previous increments continue to permeate in the economy.

October’s inflation rate is also expected to be lower owing to food harvest in some parts of the country.

In order to cover the shortfall for October, CBK will try and maximise its uptake for bonds issued in November and December, said Ms Vora.

But even if the CBR rate is not increased, the high rates at which government is willing to borrow funds could see banks pressed to raise their rates as corporate depositors demand higher returns for their cash to avoid their withdrawals in favour of the government paper.

“The corporates are challenging banks to match the government. So if banks take deposits at 16 per cent how can they lend at anything below 20 per cent considering that the deposit has to be insured at two per cent among the other expenses like rent and staff costs,” said James Mwangi, CEO of Equity Bank whose institution is yet to review it minimum lending rate.

With the cost of funds going up, banks most banks have raised their minimum lending rates more than twice in four months with most of them now quoting 19 per cent.

KCB, Middle East Bank, Bank of Baroda, Diamond Trust Bank, I & M Bank and NIC Bank are some of those that have raised their rates to 19 per cent in the midst of other reviews.

The rate at which Central bank offers emergency loans to commercial banks – referred to as overnight lending-has risen to 20.5 per cent from 14 per cent at the beginning of the week.

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