Rising T-bill rates set stage for expensive loans


The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

Rising interest rates on short ended Treasury bills have set the stage for costlier bank loans with yields on all three papers now standing above 11 percent.

Yields on the 91-day paper for instance crossed the threshold in this week’s auction, reaching a return of 11.103 percent from 10.832 percent last week.

The return on the 182-day and 364-day paper also edged up slightly in the auction to 11.112 percent and 11.497 percent respectively.

Investors’ demand for shorter-dated securities and the preference for risk-adjusted returns have driven yields higher as investors shun longer-dated instruments such as Treasury bonds as cover from duration risks in an uncertain interest rate environment.

Commercial banks are expected to take a cue from the rising interest rates on Treasury bills to revise the cost of credit facilities upwards raising their margins from lending.

Traditionally, banks price loans based on rates offered by government securities which are deemed risk-free instruments.

The 364-day paper for instance features as a benchmark in determining the annual percentage rate for commercial bank loans.

Presently, the average commercial bank lending rate already stands at multi-year highs having stood at 13.09 percent in March, the highest rate since July 2018.

The higher cost of loans is however yet to dent private sector credit growth as the business and household needs including working capital outpace price concerns.

Private sector credit growth has for instance stuck above 10 percent since March last year and closed the month of April at an annualized growth rate of 13.2 percent.

The Central Bank of Kenya (CBK) observed a strengthening demand for credit from key economic sectors in the review period.

“Strong credit growth was observed in the sectors of manufacturing, transport and communication, trade and consumer durables. The number of loan applications and approvals remained strong, reflecting increased demand,” the CBK stated.

The majority of banks also have the leeway to raise interest rates for riskier borrowers following the approval of risk-based credit pricing for 33 of 39 banks.

Riskier borrowers will see a higher interest rate charge in contrast to borrowers with better creditworthiness.

So far, only Equity Bank has announced the start of implementation of the risk-based credit pricing model where riskier customers are set to pay up to 21.02 percent on the lender’s loans.

Other banks, most of whom have just received the nod of the sector regulator to effect the model are set to implement the pricing mechanism over the short to medium term with Absa Bank Kenya for instance eyeing implementation in the second half of this year.

The approval of the risk-based credit pricing mechanism hands banks the window to further raise interest margins, setting the lenders up for improved profitability.

Risk-based credit pricing is bound by the Banking Sector Charter which laid down the foundation for the scrapping of interest rate caps in 2019 by fostering fairness in credit pricing.

Beyond interest rates, the resumption of charges on bank-to-mobile transactions has opened an additional avenue for banks to prop up revenues.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.