Experts slam banks for hiking borrowing costs
By John Otini, January 17, 2023LOAN: Experts have criticised the rising interest rates by some commercial banks, saying they were unprecedented and amounted to economic sabotage. Equity Bank and NCBA are some of the banks that delivered a sharp rise in interest rates in what appears to be a sign of difficult times ahead for borrowers.
Loan rates for borrowers will have their up by as much as 21 per cent with critics saying the rates are too high. For instance, Equity Bank has written to one of its customers notifying them their rates have risen from 13 per cent to 18 per cent.
“Equity Bank received approval from CBK to implement the risk pricing-based model when lending to customers. The new pricing model applies a reference of 12.5 per cent plus a margin of 8.5 per cent,” it said.
The letter has sparked concerns on social media with critics saying this will amount to sabotage of the economy. “An 18 per cent interest rate is sabotaging the economy,” said lawyer Ahmednasir Abdullahi.
The rate increase will raise the cost of credit in the country, which is currently at an average of 14 per cent. For instance, NCBA Bank has already informed its customers of the increased interest rates that came into effect on January 6, 2023.
“Dear customer, this is to notify you of a change in our shilling and US dollar base lending rates from 10 per cent to 11 per cent per annum and 9 per cent to 10 per cent per annum respectively effective January 6, 2023,” said NCBA.
“Kenyan banks, including Equity Bank, are adopting risk-based lending and the implications are clear, customers will pay higher rates,” said Mwango Capital, a financial research firm.
Risk-based pricing
Riskier customers are to pay up to 21 per cent at Equity Bank after the lender implemented the recently approved risk-based pricing. “Disclosures from the bank show that the bank has a base of 12.5 per cent and a margin of up to 8.5 per cent,” analysts at Mwango Capital, say.
Kenyans online wondered why rates are rising so sharply saying they will increase defaults instead.
The interest rates were first adjusted at the end of November 2022, when the Central Bank of Kenya raised its benchmark rate to 8.25 per cent for the first time.
In October after the Central Bank of Kenya hiked its benchmark interest rate on September 29, by the largest margin in more than seven years, leading commercial banks began raising lending rates by up to 1.1 percentage points.