Why cost of borrowing is expected to remain high

Despite Central Bank of Kenya (CBK) data showing that the cost of loans hit a 27-month high of 12.2 per cent in April, the momentum appears unlikely to ease any time soon as inflation and weak shilling remain a threat.

Central Bank of Kenya (CBK) has already raised the base lending rate to 7.50 per cent, citing elevated inflation risks due to increased global commodity prices and supply chain disruptions.

Its data also indicates that though rates reduced marginally to 12.15 per cent in May from 12.17 per cent in February, it increased to 12.2 per cent in April 2022 due to competition for funds between lenders and the government. The push by banks for risk-based pricing model is also spurring appetite for cash from some quarters, leading to demand for loans.

A major driver of this demand is construction sector, which it feels can now allow players to have unfettered access to loans courtesy of the new model.

The model means that banks don’t price loans based on the cost of funds plus a profit margin but instead price the loans based on the risk of the borrower. 

Samuel Kariuki, a top manager at MI Vida, a residential properties development company said a homogeneous credit pricing regime disadvantaged the sector with a strong credit rating as players were charged interest rate that averages those charged to risky borrowers.

Credit rationing

“The inability to price risk also leads to rationing out with more risky borrowers,” he said adding: “Overall, therefore, we think it’s a positive development,” he added. “From a macro-economic perspective, this is a major step towards mitigating the credit rationing we have witnessed since September 2016 when interest capping laws were introduced,” Kariuki said. 

Debt constitutes 30 per cent to 60 per cent of the total project cost, depending on the risk appetite of the developer.

However, Kevin Ngige, a trade analyst with Genghis Capital considers this a desperation being shown by some sectors for capital expenditure (Capex), even as the regulator is eager to control inflation.

“I can understand the position trade, manufacturing and construction are at, which is the lack of capital necessary to conduct their trade,” he added.

The industry has been one of the fastest growing sectors of the economy in recent years, contributing 16 per cent of gross domestic product (GDP).

Ngige said the sector is already employing new unique technology-led ways to access expensive capital, which gives players headroom to access expensive capital by enabling them to price their units favourably and attract home buyers through the use of pre-fabricated and material bulk purchases.

“I assume they have in their pricing matrix, a way to monetise their units while accounting for the relatively increased financing liabilities,” he said. The 2022 Economic Survey report indicates that credit to the sector expanded by 1.9 per cent to Sh121.9 billion in 2021.

Ngige said the high cost of borrowing money is also expected to affect the common mwananchi, small industries and most significantly tier two and three banks who are likely to get thinned out, necessitating the streamlining of their operations in a bid to survive.

If the trend continues into the foreseeable future, he said, tier two and three banks will have to disrupt themselves in their lending propositions, while avoiding the risk of exposure to non-performing loans.