Anxiety has hit bank customers anticipating sharp increases in loan rates after the Central Bank of Kenya raised interest rates by 200 basis points to 12.5 percent. Raising rates makes it expensive for banks to operate forcing them to increase the cost of loans and lock out risky borrowers to keep defaults down.

Over the year, Banks have been slow to raise rates fearing a sharp jump in loan costs would increase defaults that are already at record levels. However now that the Central Bank Rate (CBR) has shot up drastically, banks will find it harder to continue bearing the cost translating to a sharper rise in loan costs.

Kenya has witnessed stubbornly high inflation which was initially being pushed by food costs following the worst drought in four decades. But even as good rains brought more food, a sharp decline in the currency has increased the cost of imports and energy prices, contributing to almost half the increase in prices.

To fight the high cost of goods, the central bank is raising interest rates faster to attract more dollars from the financial market while encouraging exporters who will earn more revenue from a weak shilling. This is anticipated to gradually stop the currency decline and cool down inflation while containing local demand. However, the cost of the sharp rate hike will be bank customers who will now be faced with expensive credit that could potentially blow up loan defaults.

Read also: CBK jumbo rate shows shilling has not yet hit its lowest point

Non-performing loans

“The ratio of gross non-performing loans (NPLs) to gross loans stood at 15.3 percent in October 2023 compared to 15.0 percent in August 2023. Increases in NPLs were noted in the manufacturing, trade, personal and household, building and construction, and transport and communication sectors. Banks have continued to make adequate provisions for the NPLs,” CBK said in the Monetary Policy Committee media release.

The Banking industry will have to react quickly to this news to manage their costs even as they try to make sure they do not create another problem of sour loans.

Lenders who have traditionally shown prudence in lending, leveraging technology and data will come out stronger in reducing exposures to non-performing loans. Banks will also quickly roll out risk based pricing, giving each borrower a rate commensurate to their borrowing behaviours. This means credit scores will become very important data sets and customers need to maintain a positive history to access loans.

Banks will also agree to loan restructuring, accepting to extend lending periods in order to keep rates manageable for borrowers. Banks will also have to invest more time and resources in issuing technical support over and above the financial agreement with borrowers especially mall businesses to ensure they manage their cash flows, drive wellness through proper budgeting and make the right investment choices.

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