Loan rates to jump on loosening CBK controls

Central Bank of Kenya building in Nairobi. FILE photo | nmg

By OTIATO GUGUYU
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Summary

• The cost of loans could jump by up to 1.5 percent if the Central bank of Kenya (CBK) yields to pressure from banks to allow them raise it citing market forces, analysts said.
• Loan prices have remained relatively low despite Kenya scrapping legal controls of credit charges on November 7, 2019 because the regulator has blocked bids by banks to raise rates.
• Analysts at Ghengis Capital say that the regulator is likely to approve new loan pricing formulas this year that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.

The cost of loans could jump by up to 1.5 percent if the Central bank of Kenya (CBK) yields to pressure from banks to allow them raise it citing market forces, analysts said.

Loan prices have remained relatively low despite Kenya scrapping legal controls of credit charges on November 7, 2019 because the regulator has blocked bids by banks to raise rates.

Analysts at Ghengis Capital say that the regulator is likely to approve new loan pricing formulas this year that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.

“The sector had expected approvals for their models at the tail end of last year and we expect that CBK is likely to give the thumbs up from this year to support private sector credit growth, which has in recent years lingered in the single digits. The risk-based pricing models are envisaged to increase customer loan rates by between 100—150 basis points,” Genghis Capital senior research analyst Churchill Ogutu said.

Mr Ogutu, however said the new rates are likely to apply to new loans rather than banks making adjustment to existing loan portfolios.

The cost of credit has been a thorny issue in the country with banks accused of being too quick to adjust rates upwards and too slow to bring them down when market conditions like Central Bank Rate (CBR) and the cost of money decline.

This formed a rallying call for Members of Parliament to cap interest rates in 2016 at 4 basis points above CBR.

This, however worked against access as banks denied borrowers money opting to lend to the government instead.

The rates were finally removed in 2019, but banks were required to develop loan pricing formulas to be approved by the CBK.

The regulatory gridlock and a lower CBR is partly the reason average lending rates dropped to 11.92 percent in October – record lows that was last witnessed in the early 1980s.