Kenya is witnessing a concerning surge in commercial bank lending rates, which have climbed to a 65-month peak of 13.5 percent as of July 2023. This surge reveals the cumulative impact of several economic factors on borrowers and has implications for both consumers and the financial sector.
Data released by the Central Bank of Kenya (CBK) has unveiled the current lending rate, marking the highest level since February 2018. This increase in borrowing costs can be attributed to a combination of factors, including rising inflation, the Central Bank Rate’s continuous climb, and the introduction of risk-based loan pricing strategies by banks.
Over the past year, inflation in Kenya has been on the rise, prompting banks to seek higher returns to offset the increased lending risks. Additionally, the CBK has raised its benchmark lending rate by a total of three percent since July of the previous year, adding further pressure on borrowers.
Consequently, interest rates on income-yielding assets such as savings and fixed deposit accounts have also seen an uptick. Savings accounts now offer a modest 3.97 percent return, while fixed deposit rates have risen to 8.1 percent as of July.
Simultaneously, government securities, typically viewed as a safe investment option, have reached multi-year highs in yield. The 364-day Treasury bill now offers an attractive return rate of 14.72 percent as of last week, attracting investors seeking refuge from volatile markets.
The consequence of these rising lending rates is expected to lead to reduced demand for credit in the private sector. The cost of borrowing has become a significant barrier for potential borrowers, potentially slowing down economic growth. Furthermore, there is a growing concern that the surge in interest rates may result in an increase in non-performing loans (NPLs) as borrowers grapple with repayment.
However, amid these challenges, Kenya’s private sector credit growth remains resilient, maintaining double-digit growth at 12.1 percent as of July. Notably, this strength has been observed in sectors such as manufacturing, transport and communication, trade, and consumer durables, providing some optimism in an otherwise challenging environment.
As Kenya navigates this period of elevated lending rates, attention is focused on the Central Bank of Kenya’s future policy decisions. Stakeholders are eagerly awaiting measures to stabilize the economic
Photo source: Citizen.digital
By: Montel Kamau
Serrari Financial Analyst
18th September, 2023
