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Equity Bank 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 prices in line with the new benchmark rate announced by the Central Bank of Kenya (CBK), in what will see its customers start paying more to service their loans.

Kenya’s most profitable bank notified its customers that it will adjust its lending rate to 14.69 percent, up from 12.5 percent in January.

Customers’ loans will now be priced at 14.69 percent plus a margin determined based on each customer’s risk profile, meaning some will see their total interest rate rise above the maximum of 21 percent that Equity announced in January.

The changes come after CBK raised the central bank rate (CBR) from 9.5 percent to 10.5 percent— the highest point in nearly seven years.

Following the adjustment of CBR from 9.5 percent to 10.5 percent, we wish to inform our customers that we shall adjust loan interest rates to reflect a revised Equity Bank Reference Rate (EBRR) of 14.69 percent plus a margin based on the customer’s credit risk with effect from 10th July 2023,” said the lender in a notice.

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

Equity Bank Kenya’s yield on loans—the annual net profit that it earns on lending—stood at 10.9 percent in the quarter that ended March 2023 compared with 10.9 percent in a similar period last year. This was even as the cost of funds fell from four percent to 2.9 percent.

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

Banks have been shifting to risk-based pricing regime where different consumers are charged different interest rates based on the estimated risk that the consumers will fail to pay back their loans.

Widespread adoption of risk-based lending has been rising the cost of credit for most borrowers but it has helped incentivize banks to lend more as the increased returns 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, signaling the economic struggles that have seen the share of non-performing loans hit a 16-year high.

CBK data shows the non-performing loans (NPLs) ratio— the proportion of loans for which no interest or principal has been received for at least three months—hit 14.9 percent in May from 13.3 percent in December, as the stock of bad loans piled.

The stock of bad loans has risen from Sh487.7 billion in December to close April at Sh570.6 billion, with the worsening of the NPLs ratio in May pointing to a further rise in non-payments.

At 14.9 percent, the latest NPL ratio is only rivalled by 15.04 percent that the banking sector posted 16 years ago in June 2007 when the gross loan book stood at Sh470 billion and gross defaults were Sh70.

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