Commercial banks have raised their base lending rates for the seventh straight month to close June at 13.31 percent, pointing to costly credit for borrowers in the wake of the Central Bank of Kenya (CBK) rate hikes and rising returns on government paper.
Latest data from the CBK show the average lending rate rose from May’s 13.21 percent to continue the upward trend that started in December when rates jumped to 12.67 percent from 12.36 percent.
The base lending rates, added to a margin to reflect other factors such as customers’ risk profile, have seen some borrowers access loans at rates above 20 percent.
Equity Bank Kenya for instance adjusted its base lending rate to 14.69 percent at the beginning of August, up from 12.5 percent in January, sending the total interest rate for some of the customers to levels above 21 percent.
The latest average base lending rate for the sector is the highest since March 2018 when the figure was at 13.49 percent. The rise has come in an environment in which the CBK has been increasing its base rate.
The CBK on June 26 raised the central bank rate from 9.5 percent to 10.5 percent— the highest point in nearly seven years and left the rate unchanged in the August 9 review.
Equity Group CEO James Mwangi said in a Wednesday press briefing that interest rates are also trending upwards in line with the pricing of government paper.
“When the government increases interest rates or issues three-year bonds at 16 percent or 17 percent, it means that we can’t undermine the sovereign risk rate by issuing interest rates lower than that,” he said.
Banks have also been shifting to a risk-based pricing regime where different consumers are charged different interest rates based on the estimated risk that the consumers will fail to pay back their loans.
Widespread adoption of risk-based lending has been raising the cost of credit for most borrowers but it has helped incentivise banks to lend more as the increased returns cover the risk of default by some customers.
