Fresh squeeze on borrowers as banks raise cost of loans


A KCB Bank branch on Mama Ngina Street in Nairobi on March 15. The lender has raised interest rates on its KCB M-Pesa mobile loans. 

Photo credit: Dennis Onsongo | Nation Media Group

Borrowers face tougher times ahead amid a move by banks to raise the cost of loans, which will hit those currently servicing loans and those planning to  take them up.

This means reduced incomes for individuals and a higher cost of running business and leaner margins for entrepreneurs at a time the high cost of living has left many Kenyans struggling.

It comes after the Central Bank of Kenya (CBK) raised the Central Bank Rate (CBR) — the benchmark rate for the lenders — from 8.75 per cent to 9.5 per cent, following a meeting of its Monetary Policy Committee on March 28.

“Dear customer, following the review of the CBR by CBK from 8.75 per cent to 9.50 per cent, effective April 1, 2023 KCB M-Pesa loan will be charged a fee of 8.85 per cent up from 8.79 per cent,” KCB Bank told customers.

The move by KCB Bank, one of Kenya’s biggest lenders, is a pointer to what awaits borrowers across the economy, as more lenders follow suit and raise the cost of their loans, which will leave businesses and borrowers who are already struggling economically with more pain.

What KCB’s rates raise means is that, while a borrower who, for instance, takes up a Sh1 million loan — the maximum one can borrow on KCB M-Pesa — he or she will now pay the lender Sh88,500 in monthly interest under the new rates, up from Sh87,900 previously. This is Sh600 in additional interest charges monthly, which totals to Sh7,200 in a year.

Cash flows

Most of the borrowers who seek such mobile loans, which have a shorter repayment period, are small business owners seeking cash flows for their operations and any increase in interest rates affects their margins as it raises the cost of doing business.

Borrowers who also depend on their monthly earnings to service loans will also take less money home as interest rates go up. Since last year when CBK started raising the CBR, lenders have been reacting by raising interest rates for loans, with NCBA Group, Standard Chartered, Housing Finance and Stanbic Bank some of the banks that raised them in October last year, following CBK’s move to raise the CBR to 8.25 per cent in September.

Kenyans are already facing a high cost of living, with inflation beyond the 7.5 per cent upper limit target of the CBK for the ninth month running, as food prices remain the main cause of economic pain. Kenya National Bureau of Statistics (KNBS) data on March inflation on Friday showed that the inflation rate stayed at 9.2 per cent.

This is the fourth time the CBK has raised the CBR within a year and lenders have been quick to react whenever new rates are announced by raising borrowing costs for their borrowers.

CBK raised CBR from seven per cent to 7.5 per cent in May 2022, then raised it to 8.25 per cent in September 2022, to 8.75 per cent in November 2022, and now to 9.5 per cent. In the latest move, CBK cited different pointers of economic difficulties.

Agricultural production

“The MPC noted the sustained inflationary pressures, the elevated global risks and their potential impact on domestic economy, and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations,” the CBK said on Friday last week.

When CBK Governor Patrick Njoroge addressed a post-MPC briefing on Thursday, he painted a grim picture of an economy hit hard by a high cost of living, hard times for businesses whose pessimism has tripled and looming el nino rains that could affect agricultural production.

Dr Njoroge also noted that the number of loan defaulters is also growing, with the ratio of non-performing loans in the banking sector having risen from 13.3 per cent in December 2022 to 14 per cent by February.

“The lower optimism is expected to lead to delays in investment decisions. It will also lead to poor operation of markets and consumer confidence will decline,” Dr Njoroge said.

The CBK conducted two surveys in March — the CEOs survey and Market Perceptions survey — which showed that more businesses are feeling the heat of economic hardships with citizens’ purchasing power dwindling on rising inflation.

But, while banks continue to slap borrowers with the high cost of loans, the sector continues to record huge profits, even as other sectors of the economy struggle due to local and global factors that have dampened the business environment.

Kenya’s top nine banks made Sh176.42 billion in net profits in 2022, which was a 25 per cent increase from the Sh141 billion they made in 2021.