Borrowers feel heat as loan prices hit 33-month high

Loan prices

Monetary policy team raised CBR rate to 7.5 percent, the first increase since July 2015.

Photo credit: File | Nation Media Group

Borrowers have begun feeling the pinch of tightening lending rates by the Central Bank of Kenya with the cost of loans by commercial banks already hitting a 33-month high in August.

Data from the CBK shows the cost of loans from commercial banks hit 12.38 percent in August which is the highest rate since November 2019.

The monetary policy committee (MPC) in May raised the Central Bank Rate (CBR) to 7.50 percent from 7 percent – the first increase of the benchmark rate since July 2015 – to tame inflation.

This saw the cost of loans from commercial lenders go up to 12.27 percent in June up from 12.15 percent in March and further to 12.35 percent in July.

For the second time in four months, the MPC on September 27 raised the base lending rate further to 8.25 percent further raising the cost of borrowing as inflation hit a five-year high.

Banks have also raised the deposit and savings rates to 6.93 percent and 3.46 percent in August respectively to mop up more cash from the economy to tame inflation.

The high cost of credit has slowed down the growth of the financial services sector with many households and businesses now priced out of loans.

Data from the Kenya National Bureau of Statistics (KNBS) shows the financial and insurance sector grew by 11.6 percent in the second quarter of 2022 compared to 17.3 percent in the same quarter of 2021.

“The cost of borrowing from commercial banks increased with interest rate rising to 12.27 percent as at end of June 2022 from a rate of 12.02 percent in June 2021, while the savings rate decreased from 2.55 percent in June 2021 to 2.50 percent in June 2022,” said KNBS.

The tightening of the credit market comes at a time inflation has increased to the highest level in five years driven by a sharp rise in the cost of food, fuel, and electricity.

Inflation hit a 63-month high of 9.2 percent in September, the highest year-on-year inflation rate since June 2017.

The high inflation rate has forced many businesses and households to turn to loans to meet their daily needs.

President William Ruto is pushing for reforms in the financial sector to drive down the cost of loans, especially for the poor.