Equity becomes first bank to raise loan interest to reflect new CBK rate

Equity Bank has become the first lender to announce an increase in loan rates in line with the new benchmark rate announced by the Central Bank of Kenya (CBK), while its customers will start paying more to service their loans from Monday.

The most profitable Bank of Kenya on Thursday notified its clients that it would adjust its lending rate to 14.69 percent, up from 12.5 percent in January.

Customer loans will now be priced at 14.69 percent plus a set margin based on each customer’s risk profile, meaning some will see the overall interest rate higher than the 21 percent cap Equity announced in January.

The changes come after the Central Bank of Kuwait on June 26 raised the central bank interest rate from 9.5 percent to 10.5 percent – the highest point in nearly seven years.

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“After adjusting the CBR on June 26, 2023 from 9.5 percent to 10.5 percent, we would like to inform our customers that we will adjust interest rates on loans to reflect the Equity Bank Reference Rate (EBRR) of 14.69 percent plus a margin based on credit risk,” the lender said in a notice. Client as of July 10, 2023.

The changes will apply to all existing and new Ksh-denominated loans, according to the lender whose loan book in the Kenyan market stood at Sh448.9 billion at the end of March.

The return on loans at Equity Bank in Kenya – the annual net profit it makes from lending – was 10.9 per cent in the quarter ending March 2023 compared to 10.9 per cent in the same period last year. This was even as the cost of money fell from four percent to 2.9 percent.

Other banks are expected to follow equity in revising the cost of loans upward, in a move that would require customers to increase their monthly interest payments.

Banks have switched to a system of risk-based pricing whereby different consumers are charged different interest rates based on the assessed risk that consumers will fail to repay their loans.

The widespread adoption of risk-based lending has made credit more expensive for most borrowers, but has helped motivate banks to lend more because the increased yields cover the risk of default by some customers.

Borrowers have hit banks with an additional Sh82.9 billion in loan defaults in just four months of the year, indicating economic hardship that has seen the proportion of non-performing loans rise to a 16-year high.

Central Bank of Kuwait data shows that the non-performing loan ratio – the percentage of loans for which interest or principal has not been received for at least three months – reached 14.9 percent in May from 13.3 percent in December, as the balance of bad loans accumulated. .

The balance of bad loans rose from Sh487.7 billion in December to close in April at Sh570.6 billion, with a deterioration in the non-performing loan ratio in May indicating a further increase in defaults.

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The NPL rate was 14.9 percent, rivaled only by the 15.04 percent recorded by the banking sector 16 years ago in June 2007 when the total loan portfolio reached NIS 470 billion and defaults totaled NIS 70.7.

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