Commercial bank lending rates hit 65-month high

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

The average commercial bank lending rate has climbed to a 65-month high of 13.5 percent as of July, revealing the compounded effect of the general rise in interest rates on borrowers.

According to new data from the Central Bank of Kenya (CBK), the average lending rate by banks now stands at its highest level since February 2018.

The higher borrowing rates are an outcome of multiple factors including rising inflation, climbing Central Bank Rate and the start of risk-based loan pricing by banks.

Rising inflation over the past year has seen banks pushing for a higher risk-adjusted return from lending activities while the Central Bank of Kenya (CBK) has raised its benchmark lending rate by a cumulative three percent since July last year.

Other interest rates on value/income-yielding assets including savings and fixed deposit rates have jumped to 3.97 and 8.1 percent respectively as of July.

At the same time, yields on government securities which are usually described as the risk-free rate have equally soared to multi-year highs with the return on the 364-day Treasury bill topping 14.72 percent as at last week.

The rise in borrowing rates is expected to mute demand for credit from the private sector as part of potential borrowers view the cost of funds as inhibitive.

Equally, the rising interest rates have the potential of breaking the backs of some borrowers resulting in a pickup in the level of non-performing loans (NPLs).

Nevertheless, private sector credit growth has remained resilient, sticking up double digits at 12.1 percent in July with strong credit growth being observed in manufacturing, transport and communication, trade and consumer durables.

The demand for credit has found a footing from resilience in economic activities. “The number of loan applications and approvals remained strong, reflecting resilience in economic activities” the CBK stated in August.

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