Consumers start feeling loans pain as banks raise rates

Kenyan banks have started increasing the cost of their shilling-denominated loans in the wake of the Central Bank of Kenya’s decision to increase its benchmark lending rate to an 11-year high.

NCBA Bank has increased its base lending rate to 16.5 percent from 14.5 percent, becoming the second lender to make such an announcement after Equity Bank whose interest rate rose to 17.56 percent from 14.69 percent.

CBK hiked the base lending rate to 12.5 percent from 10.5 percent —the highest in 11 years— citing the need to arrest the slide of the shilling and keep inflation in check.

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The move signalled banks to increase their lending rates, with several institutions preferring to re-price the cost of new loans rather than existing credit facilities.

Higher interest rates signal tougher times ahead for businesses and consumers who are grappling with an overall rise in the cost of living.

“In view of the recent increase in the Central Bank of Kenya (rate), we wish to advise that our Shillings Base Lending rate will increase to 16.5 percent per annum,” NCBA said in a notice to customers.

The lender did not disclose the effective date of the rates that will apply to all new shilling loans but Equity Bank started applying the new rates last week.

NCBA’s loan portfolio in Kenya stood at Sh270.6 billion as at September this year compared to Sh238.3 billion a year earlier.

Equity Bank had at the start of this month become the first lender to raise the cost of loans days after CBK’s move.

“Equity Bank wishes to notify our customers and the general public that the Bank shall, effective December 11, 2023, adjust Equity Bank’s reference rate from the current 14.69 percent to 17.56 percent,” the lender had said early this month.

Equity’s loan book in the Kenyan market was Sh454.4 billion as at September from Sh422.32 billion a year earlier.

The weighted average interest rates by commercial banks have been on a rise and hit 13.68 percent in September.

The higher interest rates come at a time when banks have been grappling with a spike in defaulted loans, blamed on a combination of the higher debt service costs as well as deteriorating cash flows among businesses and households.

Defaulted loans peaked to a 16-year high of 15 percent or more than Sh596 billion of the total loan book of banks in August. The rate of the non-performing loans matched that of June 2007 which was 14.5 percent.

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Banks had cautioned the CBK to keep the benchmark lending rate unchanged at 10.5 percent but the apex bank ignored the calls, a move it said will help slow the weakening of the shilling.

The banking regulator had kept the rate unchanged at 10.5 percent since the end of June on easing inflation.

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