Capital Markets

Loan interest charges rise to 16-month high

cbk (1)

Central Bank of Kenya. FILE PHOTO | NMG

The interest charged on loans in Kenya has bounced back to pre-Covid levels as demand for credit improved on resurgent economic activity.

The latest data by the Central Bank of Kenya (CBK) shows the lending rate hit 12.09 percent in July –the highest since March 2020 when the country reported its first case of Coronavirus infection.

The loan interest charges recorded in July is seven basis points higher than the 12.02 percent recorded in June — pointing to potential further rises in the coming months as more sectors of the economy climbed out of the downturn caused by the pandemic.

The rise is despite the CBK’s efforts in maintaining the benchmark rate at seven percent to enable households to access credit in an economy that was ravaged by the Covid-19 pandemic.

Players in the sector attribute the rise in the cost of loans to an increasing in demand for credit among households and businesses with improving economic activities.

Kenya Bankers Association (KBA) chief executive Habil Olaka has said the rise is marginal and would not have a huge hit on borrowers.

The increase signals a higher cost of credit to households and businesses in the coming months as the economy recovers.

“The rise is marginal and consumers would barely feel it. The lending rate is purely the interest banks charge on loans, other charges are not included in the lending rate,” said Dr Olaka.

“Demand for credit is among the biggest factor affecting loan pricing, however, excise charged on loan fees and commissions and the lending rate are not related.”

Industries and corporates cut down their activities in response to the restrictive measures undertaken and declined consumption leading to job and income losses among employees.

The rise in loan costs come at a time when the government implemented the 20 percent excise duty on fees and commissions earned from loans and advances to customers from July 1.

This will lead to an increase in the total cost of credit as the tax is directly passed to the borrower, forcing them to part with more cash to repay the loan even as they reel from the impact of the pandemic.

Bank charges fees other than the interest rate such as negotiation fees, mobile money notification charge, insurance, stamp duty, security registration fee, and legal fees - which differ depending on the lenders.

Previously, those fees and commissions were exempted from excise duty but started attracting 20 percent for each category after the signing of Finance Bill 20201.

“While I am not able to quantify the volumes that have come in since July, the anecdotal impact is when you apply for a facility, there are those fees you pay like the attendant costs and charges that accompany the interest rates. When the excise duty on those fees goes up to 20 percent, you expect the loan will go up,” Dr Olaka added.

“Excise duty is not a charge on the business, it is charged on the consumer so ultimately banks will be forced to pass them on to borrowers.”

The demand for credit is expected to push the interest rates higher as the economy recovers.

Data shows growth in private sector credit increased to 7.7 percent in June 2021, from 6.8 percent in April due to a higher number of loan applications from sectors such as manufacturing, transport and communications, and consumer durables.

However, banks are still taking a cautious stand in leading in a move to reduce exposure from higher defaults, with the majority reporting muted growth or a decline in their loan book on the extension of personal and business loans in the six months to June.

Average lending rates fell to 11.75 percent in September last year representing a more than 30-year low as banks took a cautious approach in extending fresh credit in an environment where companies and individuals were increasingly seeking moratoriums on their loans in the wake of the pandemic.

In a survey by CBK, the majority of the banks showed interest in lending to the government through the Treasury bonds and bills, or lending to each other.