Capital Markets

Cost of bank loans reach 27-month high on T-bills


Central Bank of Kenya. FILE PHOTO | NMG

Bank lending rates hit a 27-month high in April as costs of wholesale deposits increased following competition for funds between lenders and the government, setting up costly credit for homes and businesses in a recovering economy.

The average lending rate rose to 12.2 percent in April — the highest level since January 2020, Central Bank of Kenya (CBK) data shows.

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.

Lenders link the interest rate rise to an increase in Treasury bill rates in recent months as more banks consider increasing their base rates in an economic setting where the State does not have full control over loan prices.

The government’s increased borrowing from the domestic market has pushed the benchmark 91-day Treasury bill yields from 6.86 per cent in June last year to 7.86 percent, forcing bankers to match it in an attempt to encourage larger depositors to leave their money with banks instead of lending to the State.

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This has forced banks to raise the rates for wholesale deposits and ultimately pass on the additional costs to consumers in the form of expensive loans.

“The interest rate on deposits for our high-net-worth depositors are rising due to T-bills because we are in competition for funds with the government,” a CEO of a top bank told Business Daily while seeking anonymity for fear of CBK reprisals.

“The T-bills are rising and the industry is facing pressure to increase lending on the high cost of deposits.”

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 Central Bank of Kenya to revise upwards the risk premium in what could end the era of cheap credit.

Six banks have received regulatory approvals for risk-based lending.

CBK signalled the high-interest rate regime when it raised its benchmark interest rate (CBR) by 50 basis points to 7.5 percent at the May 30 Monetary Policy Committee (MPC) meeting.

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

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In the one year to April, the CBK noted that the sectors that lead the economy in job creation were recording the highest growth in credit demand and growth.

The manufacturing, transport, trade and consumer durables segments recorded credit growth of between 11 percent and 20 percent, generally beating the industry average of 11.5 percent, but this performance is now at risk should rates go up further.

Notably, the average credit growth remains below the 12 to 15 percent range that the CBK considers ideal to fuel the healthy growth of the economy.

Increased domestic borrowing is expected to influence lending rates in the short term.

The government plans to borrow some Sh662 billion from the domestic market in the new fiscal year starting July 1, up from Sh540 billion in the current period.

Analysts say that rising rates on government debt securities are forcing banks to also increase returns on large-scale deposits from cash-rich firms and high-net-worth investors like pension schemes.

This ultimately ups pressure on lending rates because deposits from large savers influence the pricing of loans.

Besides the 91-day T-bill, other government securities have also seen a significant increase in rates in recent weeks.

The rate on the 364-day T-bill, for instance, has increased to 9.95 percent in the recent auction, from an average of 7.51 percent a year ago.

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“Furthermore, the incessant government borrowing in the domestic market continues to have a negative impact on credit to the private sector,” the Parliamentary Budget Office (PBO) said in a January report.

Cash-rich companies and high-net-worth investors have recently pocketed huge interest incomes from commercial banks’ wholesale deposits.

Small savers, however, are not likely to make significant gains in the current market environment as their rate of return has remained at about 2.5 per cent since banks have increased their reliance on wholesale deposits to support their lending.

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