SMEs, households bear the brunt of risk-based loan pricing

Customers being served at Family Bank Tower branch in Nairobi. PHOTO | SALATON NJAU | NMG

Small businesses are being charged between 0.2 and 0.8 percentage points more in interest on bank loans compared to individual borrowers and large corporate firms, paying the price for a higher risk perception tied to the high attrition rate among new businesses.

These businesses were paying on average 14.04 percent in interest on loans of up to five years at the end of June, compared to 13.22 percent for personal loans and 13.86 percent for corporate loans.

This is before other charges are loaded on the loans, which take the effective Annual Percentage Rate on credit to as high as 24 percent.

The pricing on an overdraft facility for a business in June stood at an average of 13.91 percent, higher than that for salaried borrowers at 13.4 percent and corporates at 13.7 percent across the 39 commercial banks.

“Small businesses are riskier compared to salaried individuals or larger firms that have a steady flow of income or bigger financial muscle, hence the variance in the rate they are charged,” said a bank executive.

Households paid the highest for loans with a repayment period of more than five years, marking a two percentage point increase from 11.6 percent reported in March.

Long-term loans to corporates were priced at 13.49 percent while business loans with the same repayment period were priced at 13.43 percent.

Ecobank charged the highest rate on any business loan in June, with its overdraft facility carrying a rate of 16.8 percent while a loan of less than five years carried a rate of 16.4 percent.

Lending rates across the board rose in the second quarter of the year after more lenders received approval from the Central Bank of Kenya (CBK) on risk-based pricing, which enables lenders to charge interest based on a borrower’s risk rating.

In March, business loans were the most expensive in all three categories, beating personal and corporate loans. An overdraft facility attracted a rate of 12.45 percent compared to 11.91 percent charged to corporates.

The average interest charged on long-term loans to businesses was 12.3 percent while the same facility was advanced to households at 11.6 percent, indicating the significant jump seen in the subsequent quarter to June.

According to the Kenya National Bureau of Statistics MSMEs report of 2017, the high cost of credit is among the biggest challenges facing businesses in the country.

In the report, 25 percent of businesses cited high credit costs and inadequate collateral as their reason for the low uptake of loans.

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