Interest rates

Banks hit big business with higher interest rates


Banks hit big business with higher interest rates

Habil Olaka, CEO of Kenya Bankers Association (KBA). PICTURES | NJAU SALATON | NMG

Commercial banks are now charging larger companies higher interest rates on loans compared to start-ups and individual borrowers, according to new data from the Central Bank of Kenya (CBK), indicating a higher perception of risk large corporations that have accounted for the bulk of the surge in non-performing loans over the past two years.

CBK data on lending rates by category of borrower show businesses paid an average of 13.95% on one- to five-year loans in September, up from 11.9% a year earlier.

For their part, small businesses, which paid the highest average rate a year ago at 12.5%, are now being asked for 13.8% as loan pricing swings in their favor.

Personal loans to individuals attracted an average interest rate of 13.2% in September, against 12.1% a year earlier.

Business borrowers have traditionally paid lower interest on loans compared to small businesses and individuals due to a lower risk of default.

READ ALSO : Banks raise cost of loans following CBK rate hike

But the economic crisis triggered by the Covid-19 pandemic and exacerbated by the war in Ukraine has complicated the fortunes of large companies, whose payment defaults have triggered tremors in the banking sector.

Earlier this year, the CBK pointed to a few large companies – which it did not name – as responsible for the rise in loan defaults that pushed the banking sector’s bad debt portfolio to a record $514 billion. shillings in June, although this has fallen. to Sh505 billion in August.

These companies, especially those in the manufacturing sector, have gone through difficult times due to the Covid-19 pandemic which has reduced the demand for goods in the local economy.

This year they have also been rocked by rising input prices due to supply chain disruptions resulting from the Russian-Ukrainian war that began in February, and periodic Covid-19 prevention shutdowns in China. , where Kenya sources most of its capital goods.

Rising fuel prices, which increased the cost of goods and therefore local inflation, also had a negative effect on the demand for manufactured goods.

The CBK’s interest rate data does not, however, show the full cost of credit, known as the annual percentage rate of charge (APR), which includes the cost of associated charges charged on a loan.

The APR for personal loans, according to data from the Total Cost of Credit (TCC) website operated by the CBK and the Kenya Bankers Association (KBA), reaches 23.8% for unsecured facilities with a maximum duration of five years.

The website only allows APR calculations for personal loans and mortgages, making an identical comparison of the total cost of business loans difficult.

Banks were recently allowed to start rating risk in their lending plans according to formulas that have been approved by the CBK, indicating higher lending rates for individuals and businesses considered high default candidates.

The risk-based pricing scheme was proposed with the aim of expanding access to bank loans, especially for SMEs, which have traditionally struggled to obtain finance from banks due to a perception at high risk.

Rising bank plan approvals led to an increase in annual credit growth to the private sector to a six-and-a-half-year high of 14.2% in July, which however fell to 12.5% ​​in August due to of the General Assembly. Election.

Private sector lending rates also rose in line with signals from the monetary regulator which has since May raised the central bank rate (CBR) by 1.25 percentage points to 8.25%, in the face of high inflation which has hit a 65-month high of 9.6% in October.

Central banks around the world, including the US Federal Reserve and the Bank of England, raised policy rates as they battle runaway inflation that has hit 40-year highs in both Western economies.

For local banks, the CBK’s decision to increase its CBR signals a higher cost of funds, prompting them to raise their rates on customer loans.

At the same time, the government is also paying higher rates in its domestic borrowing program for the current fiscal year, as the Treasury struggles to attract takers for its bond offerings.

The rate on the one-year Treasury bill has now climbed to 10%, the highest in three years, while the October Treasury bond sale also saw the CBK accept offers at a price above 14 % after months of resistance touching this level in monthly auctions.

Private sector borrowers competing with the government for bank funds end up paying a premium over the interest rates offered by the government on its bonds and treasury bills, since the Treasury is a risk-free borrower.

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