Kenya: Banks loan rate jumps to two-year high on demand

The average interest charged on loans by Kenya’s commercial banks has risen to its highest level in two years amid increased demand for credit as the economy recovers from Covid-19 disruptions.

The latest data by the Central Bank of Kenya (CBK) shows the lending rate hit 12.17% in February –the highest since February 2020 when it stood at 12.19%.

Demand for credit has gone up in the personal and household, trade, and manufacturing segments, with banks seeking regulatory approval to raise rates on riskier borrowers.

“Demand for credit is among the biggest factors affecting loan pricing, however, excise charged on loan fees and commissions and the lending rate are not related,” said Kenya Bankers Association (KBA) chief executive Habil Olaka in an earlier interview.

Several lenders have sought approval from the CBK to switch to risk-based loan pricing, setting the stage for expensive credit for small traders and workers in the informal sector.

Equity Bank was the first lender to publicly reveal that the regulator had approved the risk element in its lending formula, two years after discussions started.

Lenders such as Co-op Bank, KCB Group, and NCBA Group have remained tightlipped on their applications to the CBK for review of their lending rates.

The increase in lending rates signals a higher cost of credit to households and businesses in the coming months as the economy rebounds.

At the peak of the Covid-19 pandemic, industries and corporates cut down their activities in adherence to the restrictive measures undertaken, in what saw a dip in consumption, resulting in job cuts and income losses among employees.

Bank executives had protested to the International Monetary Fund (IMF) over the CBK’s reluctance to approve their applications to raise the cost of loans following the scrapping of interest rate controls on November 7, 2019.

On its part, CBK has said it had examined the new loan pricing models presented by banks and found them wanting, sending the lenders back to the drawing board.

Banks have been eager to price loans to different clients based on their risk profile but this flexibility remained a mirage after the CBK stepped in as the de facto controller of the cost of credit.