Average commercial bank borrowing rates hit an 81-month high of 13.83 percent in August, mirroring the effects of a rising interest rates environment.
The rising cost of commercial borrowing points to cost implications for borrowers, many of whom will now be required to increase payments to not just new but also existing credit facilities, where some consumers may be unable to afford loans or default on expected payments.
For commercial banks, rising interest rates present the opportunity to profit from increased lending margins, even as the risk of distressed borrowers proves to be an Achilles heel of the industry.
The mean commercial bank lending rate is the highest since November 2016 and represents the 10th consecutive month-over-month increase in commercial borrowing rates according to data from the Central Bank of Kenya (CBK).
The higher costs for borrowers are attributable to a convergence of factors including tighter monetary policy from the upward shift in the benchmark lending rate by the CBK to counter inflation and changes to the sovereign and exchange rate risks.
Borrowing costs are expected to edge up further towards the close of 2023 as lenders further reprice the cost of loans under the risk-based pricing regime.
Already borrowers with credit facilities at local banks have received communication from their respective lenders.
NCBA has for instance raised its internal benchmark lending rate on shilling and dollar-denominated facilities while Standard Chartered Bank's benchmark lending rate is set to jump to 11.5 percent in November in contrast with 10.5 percent in August.
“Due to the current macro-economic environment and rising interest rates, we wish to advise that our base lending rate will increase to 14.5 percent for shilling-denominated loans and to 11 percent for dollar facilities effective November 8,” NCBA said in a notice to customers earlier this month.
With the majority of banks, at least 30 of the 38 licensed banks receiving approvals for risk-based pricing, commercial banks have gained the nod of the CBK to amend interest rates on facilities based on each customer’s risk profile.
The higher interest rates on commercial borrowing are expected to persist for longer with Central Banks in advanced economies outlining plans to keep interest rates up for longer to keep inflation at bay.
The demand for credit from the private sector has held up against the higher cost of loans to stick at double-digit levels. Private sector credit growth for instance recovered to 12.6 percent in August after dropping to 10.3 percent in July.
“Strong credit growth was observed in manufacturing, transport and communication, trade and consumer durables. The number of loan applications and approvals remained strong, reflecting resilient economic activities,” the CBK noted.
