Lenders increase interest on loans as Central Bank asks customers to quit

Kenya Bankers Association Chief Executive Officer Habil Olaka (left) and director Centre for Research on financial markets and policy Jared Osoro during the release of KBA Housing Price Index findings for Quarter 3, 2015 at the Hilton Hotel in Nairobi on October 26, 2015. Mr Olaka said banks that are slow to respond to market movements risk losing market share. PHOTO | SALATON NJAU | NATION MEDIA GROUP  

In Summary

• Commercial banks have defied calls by the industry lobby and regulator to lower interests on loans.
• The Kenya Bankers Association has supported calls by Treasury and the Central Bank of Kenya urging customers to shun the banks charging high interests.
• Commercial Bank of Africa has increased the applicable interest margin by an additional 2 per cent per annum.
• The interest rates for government securities have since fallen, with the three-month Treasury Bill selling at 9.2 per cent last week.

By BRIAN NGUGI
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Commercial banks have defied calls by the industry lobby and regulator to lower interests on loans on the back of a relatively favourable fiscal environment marked by low Treasury Bill rates.

The Kenya Bankers Association (KBA) has supported calls by Treasury and the Central Bank of Kenya urging customers to shun the banks charging high interests.

“This is a very competitive market and banks compete on factors including price. Those banks that are slow to respond to market movements risk losing market share as their customers will simply vote with their feet,” said KBA chief executive Habil Olaka on Monday.

Mr Olaka spoke as a section of customers learnt with shock that many banks would go ahead and effect earlier notices they had served borrowers indicating that the interest rates on their loans would be pushed up by several percentage points despite the lowering of Treasury Bills rates.

In a notice to customers, which took effect on Monday, Commercial Bank of Africa (CBA), for instance, said it had found it necessary to increase the applicable interest margin by an additional 2 per cent per annum.

DOWNWARD MOVEMENT

“We, therefore, wish to advise you that the new interest margin “K” applicable to your Kenya Shilling credit facility will, therefore, be increased from 18.74 per cent to 20.74 per cent with effect from 7 December, 2015. The current Kenya Bankers Reference Rate (KBRR) remains unchanged,” said the lender.

It added: “We, however, note the recent downward movement in Treasury Bills, a KBRR component reference rate. We expect that if this continues, the bank will be able to similarly reflect this reduction in its facility interest margins. For scheme customers, the current monthly instalment amount remains unchanged. However, your loan tenor may be varied.”

RATES SOARED

The interest rates for government securities soared two months ago, with the 91-day Treasury Bill peaking at 22.5 per cent yield on October 22.

The rates have since fallen, with the three-month Treasury Bill selling at 9.2 per cent last week.

In a drastic call that hinted of heightened frustration by CBK at failure by banks to reciprocate the lowering of Treasury Bill rates, the CBK governor, last week asked borrowers to walk out of banks that have refused to cut interest rates.

“Our view is still the same, commercial banks need to lower their rates in a proportionate way. This is where people need to vote with their feet, I mean why do you feel trapped? If you think it is a high rate, why not move to another bank?’’ Dr Patrick Njoroge posed.