Borrowers brace for costly loans as banks raise rates
Borrowers are set to pay more in loan servicing costs in a move likely to choke up liquidity in the market as banks increase interest rates to safeguard their margins.
To anchor inflation expectations, the Central Bank of Kenya (CBK) hiked its benchmark interest rate by the largest margin in more than seven years which has seen commercial banks start raising lending rates by up to 1.1 percentage points, paving the way for pricey loans in a rebounding economy.
Several lenders including NCBA Group, Standard Chartered, Housing Finance, and Stanbic Bank have already informed customers that the base rate on their loans will increase starting this month.
“In line with the increase in the central bank of Kenya rate from 7 per cent to 8.5 per cent and an increase in the United States Federal Funds Rate from 0.25 per cent in January to the current 3.25 per cent, the NCBA base lending rate has been adjusted as follows,” the bank said in a statement to customers.
The lenders are responding to the CBK’s decision on September 29 to anchor inflation expectations by increasing the benchmark interest rate by 75 basis points to 8.25 per cent.
Credit facilities
It was the first policy meeting of the central bank since newly elected President William Ruto assumed office last month. It was also the second rise of the year and the sharpest since July 2015.
According to regulatory announcements, Stanbic and Standard Chartered hiked their base interest rates by 0.75 percentage points, while NCBA boosted their by 1.1 percentage points as of November 11.
“In compliance with existing legislation on the administration of credit facilities, including the Consumer Protection Act and the Banking Act, we hereby advise you that we have revised the Stanbic Prime Rate (SPR) reference basis for calculating our lending rates from 8.80 per cent per annum to 9.55 per cent per annum,” Stanbic said in a notice.
To calculate how much to charge a specific client, banks add a margin and a risk premium to a base rate, which is often the cost of funds.
They are currently evaluating base rates, and many have requested that the CBK increase the risk premium, which might signal the end of the period of low-interest rates.
The economy recorded strong performance in the second quarter of 2022 supported by the non-agriculture sectors.
It grew by 5.2 per cent, supported by strong activity in financial and insurance, transportation and storage, wholesale and retail trade, real estate, and construction sectors.
However, the performance of the agriculture sector remained subdued due to unfavourable weather conditions.
