Interest charges on loans reach their highest level in 16 months

By ELIZABETH KIVUVA
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Summary

• Interest charged on loans in Kenya has rebounded to pre-Covid levels as demand for credit improved following the resumption of economic activity.
• The CBK shows that the lending rate reached 12.09% in July, the highest since March 2020, when the country reported its first case of coronavirus infection.

Interest charged on loans in Kenya has rebounded to pre-Covid levels as demand for credit improved following the resumption of economic activity.

The latest data from the Central Bank of Kenya (CBK) shows the lending rate hit 12.09% in July, the highest since March 2020, when the country reported its first case of coronavirus infection.

Loan interest charges recorded in July are seven basis points higher than the 12.02% recorded in June, indicating further potential increases in the coming months as more sectors of the economy exit the slowdown caused by the pandemic.

The hike comes despite efforts by the CBK to keep the benchmark rate at seven percent to allow households to access credit in an economy ravaged by the Covid-19 pandemic.

Sector players attribute the rise in the cost of loans to an increase in demand for credit from households and businesses with the improvement of economic activities.

Kenya Bankers Association (KBA) chief executive Habil Olaka said the increase was marginal and would not have a huge impact on borrowers.

This increase signals an increase in the cost of credit for households and businesses over the coming months as the economy recovers.

“The increase is marginal and consumers would hardly notice it. The loan rate is purely the interest that banks charge on loans, other charges are not included in the loan rate, ”said Dr Olaka.

“Credit demand is one of the main factors affecting loan pricing, however, the excises charged on loan fees and commissions and the loan rate are unrelated.”

Industries and businesses have reduced their activities in response to restrictive measures taken and have reduced consumption resulting in loss of jobs and income among employees.

The rise in loan costs comes at a time when the government implemented the 20% excise tax on fees and commissions charged on loans and advances to customers from July 1.

This will lead to an increase in the total cost of credit as the tax is passed directly on to the borrower, forcing them to part with more money to pay off the loan even while reeling from the pandemic.

The bank charges fees other than the interest rate such as trading fees, mobile money notification fees, insurance, stamp duties, security registration fees, and legal fees – which differ according to lenders.

Previously, these fees and commissions were exempt from excise duties but started to attract 20% for each category after the signing of the 20201 finance bill.

“While I’m not in a position to quantify the volumes that have come in since July, the anecdotal impact is that when you request an installation, there are those fees that you pay as well as the associated costs and fees that come with the rates. of interest. When the excise duty on these charges reaches 20 percent, you expect the loan to increase, ”Dr Olaka added.

“Excise duties are not a burden on the business, they are billed to the consumer, so the banks will ultimately be forced to pass them on to the borrowers.”

Demand for credit is expected to push up interest rates as the economy recovers.

Data shows that growth in credit to the private sector rose to 7.7% in June 2021 from 6.8% in April due to a higher number of loan applications from sectors such as manufacturing, transport and communications; and durable consumer goods.

However, banks still take a cautious stance in taking action to reduce exposure to higher defaults, with the majority reporting moderate growth or decline in their loan portfolios on extension of loans. personal and business loans in the six months prior to June.

Average lending rates fell to 11.75% in September of last year, representing a more than 30-year low as banks took a cautious approach to granting new credit in an environment where businesses and individuals were increasingly seeking moratoriums on their loans in the wake of the pandemic.

In a CBK survey, the majority of banks expressed an interest in lending to the government through Treasury bills and bonds, or in lending to each other.