Capital Markets

Banks raise cost of loans on CBK jumbo rate hike


Central Bank of Kenya Governor Patrick Njoroge. PHOTO | SALATON NJAU | NMG

Top commercial banks have started increasing lending rates by up to 1.1 percentage points after the Central Bank of Kenya (CBK) raised its benchmark interest rate by the biggest margin in more than seven years, setting the stage for costly credit for homes and businesses in a recovering economy.

NCBA Group, Standard Chartered, Housing Finance and Stanbic Bank are some of the lenders that have notified clients that the base rate on their loans will rise from this month.

The lenders are reacting to the CBK’s decision of September 29 that raised the benchmark interest rate by 75 basis points to 8.25 percent to anchor inflation expectations.

It marked the central bank’s first policy meeting since newly elected President William Ruto took power last month, and second hike this year and the steepest since July 2015.

Read: CBK announces sharp rise in interest rate to fight inflation

Regulatory notices show NCBA raised its base interest rates by 1.1 percentage points from November 11 while Stanbic and Standard Chartered increased theirs by 0.75 percentage points.

Banks use a base rate that 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 CBK to revise upwards the risk premium in what could end the era of cheap credit.

The costly credit emerges in a period when the economy is witnessing increased demand for loans amid the recovery from Covid-19 economic hardships, further putting pressure on lending rates.

The higher cost of loans, however, risks locking out businesses from accessing the credit they need for expansion and in turn, limit their ability to create more jobs.

“In compliance with existing legislation on the administration of credit facilities, including the Consumer Protection Act and the Banking Act, we hereby advise you that we have revised the Stanbic Prime Rate (SPR) reference basis for calculating our lending rates from 8.80 percent per annum to 9.55 percent per annum,” Stanbic said in a notice.

Similar notices were issued by NCBA and Standard Chartered.

“Effective November 11, 2022, NCBA Bank’s base lending rate for Kenya shilling denominated credit facilities will increase from 8.9 percent to 10 percent per annum,” the NCBA Bank notice read.

The CBK’s Monetary Policy Committee (MPC) increased the benchmark rate saying the rising inflation and global risks and their impact on the domestic economy called for tightening of the monetary policy.

This matched the US Federal Reserve hike of September as central banks struggled to tame inflation.

Kenya’s inflation — a measure of annual changes in the cost of living— hit 9.2 percent in September from 8.5 percent in August, remaining above the upper limit target of 7.5 percent since June.

The MPC last raised the rate by 50 basis points at its sitting in May to stem rising inflation and stabilise the shilling.

Equity Bank said it had yet to increase its rates while Co-operative Bank noted it was awaiting a CBK approval to increase the cost of loans based on customer risks.

The CBK earlier this year began approving lenders’ applications to increase the cost of loans based on customer risks, setting the stage for expensive credit for small traders and workers in the informal sector.

Multiple bank executives had last protested to the International Monetary Fund (IMF) over the CBK’s reluctance to approve their applications to raise the cost of loans following the scrapping of interest rate controls on November 7, 2019.

Banks have been eager to price loans to different clients based on their risk profile but this flexibility remained a mirage after the CBK stepped in as the de facto controller of cost of credit.

The delayed shift to risk-based lending, the said, had forced many of them to deepen investment in government securities and restrict lending to high-quality customers with a lower risk of default.

The banking regulations of 2006 require banks to seek the CBK’s nod when changing features of any products, including loans.

The CBK has repeatedly warned banks against reverting to punitive interest rates of more than 20 percent in the post-rate cap regime and wants every lender to justify the margins it puts in its formula.

Rising interest rates will derail President Ruto’s administration’s push for cheaper loans to rev up the economy.

Kenya’s economic growth slowed for a fourth straight quarter as pre-election jitters and a prolonged drought weighed on output.

Read: World Bank downgrades Kenya's growth to 5 percent

Gross domestic product increased by 5.2 percent in the quarter ended June, down from a 6.8 percent gain in the previous three months.

That’s the slowest pace of expansion since the first quarter of last year, when restrictions to contain the Covid-19 pandemic weighed on the economy.

Credit growth dipped to 12.5 percent in the year to August, retreating from a six-and-a-half-year high of 14.2 percent recorded in July on pre-election jitters.

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