Capital Markets

Average lending rate crosses 13pc for first time since 2018

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The Central bank of Kenya, Nairobi. FILE PHOTO | DENNIS ONSONGO | NMG

The average commercial bank lending rate breached the 13 percent mark for the first time since July 2018 in the wake of the Central Bank of Kenya (CBK) benchmark rate hikes and rising yields on government paper.

CBK data show lending rates jumped from 12.77 percent in January to 13.06 percent in February—the highest level in 58 months.

Expensive credit will put loans and mortgages out of the reach of many individuals and could hobble corporate investment in Kenya’s soft economy.

Lenders are reacting to CBK’s increase of the benchmark rate three times in six months to a five-year high of 9.5 percent from 7.5 percent in May.

Rates on government paper, especially Treasury bills, which influence the cost of fixed deposits, have also increased following the State’s growing appetite for domestic borrowing.

The 91-day T-bill hit double digits for the first time since February 2016 at 10.004 percent, from an average of 7.8 percent in June last year.

Bankers reckon rising returns on government debt securities are forcing lenders to increase savings rates from large-scale deposits from cash-flush firms and high-net-worth investors such as pension schemes.

This ultimately increases pressure on lending rates because deposits from large savers influence the pricing of loans. Banks use a base rate, which is normally the cost of funds plus a margin and a risk premium, to determine how much they charge a particular customer.

They are now reviewing base rates and many have applied to the sector regulator to revise upwards the risk premium in what could end the era of cheap loans.

Average lending rate of 13.06 percent does not factor the March 29 increase in the CBK’s benchmark rate, which was increased to the highest level in five years to curb inflation, signalling costlier loans for homes and businesses.

The Monetary Policy Committee (MPC) hiked the CBK rate to 9.5 percent from 8.75 percent, matching the 0.75 percentage rise of September last year that triggered banks to increase lending rates.

The benchmark rate increases are aimed at easing credit demand in the hope of easing inflation, which remained unchanged at 9.2 percent in March. Despite increasing the benchmark lending rate by a similar margin in September, inflation has remained outside the preferred government range of 2.5-7.5 percent since June last year.

“As much as the effect of raising interest rates will end up with some unintended consequences, credit will become more accessible,” said Maurice Matumo, a former banker and now chief executive at CDI-Africa Coaching Group.

He contrasted the current scenario with the interest cap era when the cost of credit was lower but loans inaccessible.

Kenya in November 2019 scrapped the cap on banks’ commercial lending rates, which had been blamed for stalling lending to businesses.

The government and the country’s banks had blamed the cap, which the government imposed in 2016 to curb high interest rates, for choking private sector lending growth and reducing effectiveness of monetary policy.

Private sector credit growth has remained steady in double digit figures since March last year and stood at 11.7 percent in February.

That is slightly below what the central bank says is ideal credit growth of 12 to 15 percent.

“The number of loan applications and approvals declined, reflecting reduced demand,” said CBK in its post Monetary Policy Committee press release on March 29.

Interest rates are tipped to reset higher this year due to increased adoption of risk-based pricing with 24 commercial banks having already begun reviewing cost of loans based on borrowers risk profile.

Of the three tier I banks to get the regulatory nod, Equity Group started the risk based pricing from January this year with its cost of loans rising up to 21.02 percent for riskier borrowers.

Absa Bank Kenya will adopt the risk-based pricing model on loans in the second half of the year after obtaining the CBK’s nod last year.

The World Bank Group has tapered Kenya’s growth outlook for 2023 on the rising interest rates, which they expect to dampen private consumption.

The multilateral lender expects the Kenyan economy to expand by at least five percent this year.

“The slowdown in economic activity in 2023 is attributed to a deceleration of growth in private consumption associated with the impact of higher interest rates that are aimed at curbing inflation,” said the World Bank.

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