Borrowers to pay more as banks hike interest rates

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By Jackson Okoth

It will now cost more to borrow loans as commercial banks moved to increase their base lending rates, in what is expected to put more strain on Kenyans in an already dire situation.

The Central Bank of Kenya and Governor Prof Njuguna Ndung’u (inset) have been on the spot over the rate of the shilling slide. The situation has seen prices of most consumer goods skyrocket. Now commercial banks are raising their lending rates. [PHOTOS: FILE/STANDARD]

ABC bank adjusted its base-lending rate to 17.75 per cent up from 15.75 per cent, effective from Friday this week, setting the stage for what could be another period of expensive bank loans to consumers and businesses.

This comes as financial institutions try to cushion their profit margins by pushing up the cost of borrowing.
Standard Chartered, Development Bank, Bank of India, I&M Bank, Commercial Bank of Africa and Victoria Commercial Bank have also increased minimum interest on loans to about 16.5 per cent.
Analysts, though fearing the higher interest rates will limit the flow of credit to the private sector with the possibility of a slow-down in economic growth, are, however, expecting more banks to follow suit. 
The move by commercial banks follows a recent decision by the industry regulator, the Central Bank of Kenya (CBK) which raised its base lending rate or Central Bank Rate (CBR).
The bank’s top policy organ, the Monetary Policy Committee (MPC), raised the CBR by 400 basis points from 7 per cent to 11 percent to cool demand, check inflation and stabilise the shilling.
Its reasoning is that making it more expensive for banks to borrow funds from it will put brakes on a sliding Shilling and dampen inflation.
The rate, however, is the highest since 2006 and is expected to discourage borrowing, which has been blamed for increasing the amount of money in circulation and therefore fuelling inflation. 
“Banks have to adjust lending rates to maintain their spreads, now standing at between 10 per cent to 12 per cent,” said George Bodo, an analyst at Apex Africa.

While in an ideal situation banks are supposed to borrow cheaply in the short term and lend expensively in the long run, the prevailing yield curve is invested.

“The short end of the yield curve is higher than the long end, a situation that is distorted forcing banks to adjust their lending rates upwards”, said Bodo.

When the MPC adjusted the CBR to 7 per cent on September 14 this year, several commercial banks responded by also increasing their lending charges.

“This is the second round of adjustment for banks that will be between 2-3 per cent,” said Bodo.

Activity at the Nairobi Stock Exchange (NSE), already on the decline, is expected to suffer further as investors, who mostly rely on bank loans to play the market, cut back.
The rate adjustments come at a time when the country is fighting the spiralling cost of living and a rapidly depreciating Kenya shilling against major currencies, especially the US dollar.
Kenya's inflation rate rose for the 11th month in a row to 17.32 per cent in September from 16.67 per cent in August, on the back of continued rise in food prices and depreciation of the shilling.

On Monday, the shilling fell against the dollar, weighed on by poor liquidity and persistent worries over the gap between exports and imports.  Reuters reported that at 0700 GMT, commercial banks posted the shilling at 103.20/70 per dollar, down from Friday's close of 102.70/90.