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Interest rate hike to build up bad loans

Friday, December 8th, 2023 06:00 | By
Interest rate hike to build up bad loans
Central Bank of Kenya (CBK). PHOTO/Print

The economy will be hit hard with the impact of costlier loans after a two per cent increase in the base lending rate by the Central Bank of Kenya (CBK) was announced on Wednesday.

The Monetary Policy Committee (MPC) implemented the hike, raising the CBK rate from 10.5 to 12.5 per cent.

This meant to ensure that inflationary expectations remain anchored while setting inflation on a downward path towards 5.0 per cent, the same will, however, see interest rates surge further amid tough times. The average cost of loans currently stands at 19.1 per cent. But as a result of the recent increase in lending rates, some customers may experience bank rates as high as 28 per cent, reflecting the risk loan pricing exercised by most top banks. What this means is that for every Sh100 one will borrow, about Sh30 will be used to pay interest, making it one of the highest rates ever.

The heightened cost of loans raises concerns about businesses being unable to access the necessary credit for expansion, potentially limiting job creation and innovation.

Unfortunately, these adjustments occurred at a time when most commercial banks were experiencing a historic upswing in bad loans, indicating a deteriorating economic environment.

Already, financial statements from the third quarter raise fundamental concerns about non-performing loans with revelations that since January, eight of the ten tier-one lenders have seen an increase in bad loans.

Top commercial banks including Equity, Co-operative, Absa Bank Kenya and I&M have observed a rise in Non-Performing Loans (NPLs) ranging from 29 to 300 per cent since the beginning of the year. This trend has impacted lenders’ profitability as they are required to set aside billions for potential default risks within three months to maintain liquidity and support other lending activities.

Shortly before the MPC made the landmark announcement, the Kenya Bankers Association (KBA) urged CBK to maintain the anchor rates at 10.5 per cent, despite a slight easing of inflationary pressure, but clearly, this fell on deaf ears.

A further rate hike will not only exacerbate credit risk but lead to a buildup in non-performing loans, which would have negative consequences for the stability of the banking sector and the economy in general.

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