Loan rates increase to 16pc after repeal of interest controls

The Central Bank of Kenya. PHOTO | DENNIS ONSONGO | NMG

More than half of commercial banks raised their lending rates to individuals and businesses in the second quarter of the year, indicating the early impact of the accelerated approvals of risk-based lending plans by the Central Bank of Kenya (CBK).

The latest bank loan and overdraft rates data published by the regulator show that some lenders charged as high as 16.4 percent for business loans in June, and 16.8 percent for overdrafts, representing a jump of up to 4.8 percentage points from the March rates.

Ecobank Kenya’s overdraft facility for businesses rose to 16.8 percent in June from 12 percent three months earlier, while its rate for business loans of lower than five-year tenor jumped from 12.5 percent to 16.4 percent.

For personal loans of a tenor above five years, Middle East Bank is charging 16.1 percent, up from 8.1 percent in March, while on loans below five years, Kingdom Bank’s rate has risen from nine percent to 15.3 percent.

For the majority of the 28 lenders that adjusted their rates upwards, the rates on personal and business loans have gone up by up to 2.4 percentage points to 14 percent.

Last month, the CBK disclosed that more than half of commercial banks have had their risk-based lending plans approved or signed off, allowing them to factor in the creditworthiness of a borrower when determining the rate to charge on their loan.

The prolonged wait of approvals for most banks—which according to the CBK was partly due to some submitting unsatisfactory plans—had seen most of them lending at a maximum of 13 percent even after the law capping rates on loans was lifted in November 2019.

At this rate, it made more sense for the banks to lend risk-free to the government at between 10 and 13.5 percent, which meant that growth in lending to the private sector has remained below the 12 to 15 percent range that is deemed ideal to fuel healthy growth of the economy.

By being allowed to load a premium to cover lending to customers deemed riskier, the expectation is that banks will then open their wallets to small businesses and individuals, who have been struggling to access formal credit.

However, while there is an increase in approvals of risk pricing models, lenders have raised concerns that they still lack some of the supporting data necessary to accurately estimate a client’s risk profile due to the moratorium on the negative listing of borrowers with loans below Sh5 million by credit reference bureaus (CRBs).

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