Traders await anchor rate amid loan defaults concern

The recent surge in bank interest rates has hit individuals and businesses hard on the back of Central Bank of Kenya’s (CBK) elevated benchmark interest rate.

This happened twice since Governor Kamau Thugge took office, citing the need to support the country’s struggling shilling.

The CBK’s monetary policy committee (MPC) increased the rate by 200 basis points to 12.5 per cent, the largest increase since 2011, on whose wake, its deadly knock-on effects hit borrowers hard.

As another decision on the base lending rate by the CBK looms, experts warns that a higher interest rates will made borrowing more costly, especially for businesses that rely on loans for their daily operations or expansion plans.

MPC to meet this week

The situation could worsen if CBK decides to raise the rate again, as this would mean even higher debt servicing costs for businesses, which could affect cash flow, and the ability to meet their operational costs and debt obligations, leading to more loan defaults and possible insolvency.

Bankers say that higher interest rates could discourage businesses from taking out loans for investing in new projects or expanding their existing ones, which could slow down the economic growth.

Last week, the Kenya Bankers Association (KBA) urged the CBK to maintain the current 8.75 per cent rate, saying that it would help ease the inflationary pressure and protect the fragile economic activity.

“Easing inflationary pressure call for a hold on the CBR to allow its recent adjustments to be fully transmitted through the market and protect the fragile economic activity,” KBA said in a statement to the media. This as Kenyan banks are facing a significant increase in loan defaults as the number of borrowers failing to meet their loan repayment obligations hit a 10-year high at 15 per cent.

Despite the banking sector’s pre-tax profits growing by 13.6 per cent, the lenders have been compelled to allocate more funds for loan loss provisioning. This situation has been intensified by the high cost of living, stagnant wages, and unexpected increases in interest rates, all of which have contributed to a rise in loan defaults.

However, business is booming for auctioneers, as local dailies are filled with advertisements, offering a variety of properties worth millions for sale or at the mercy of the auctioneers hammer.

Many businesses are facing the risk of property auctions, with residential apartments, luxury vehicles, and prime agricultural plots being listed.

The plight of individuals and businesses facing financial difficulties is evident, with court cases involving banks pursuing businesses for outstanding debts. Farmers, too, find themselves on the auction block, with horticultural farms and agricultural plots being listed for sale.

These a signals the hardships that many are facing at the teller, as soaring unpaid loans threaten their survival.

Behind the scenes of this auction frenzy lies a tale of unfulfilled dreams and financial misfortunes, often stemming from the high cost of living and stagnant wages, leading to widespread loan defaults.

One common reason is the high cost of living and wages staying stagnant. This often means that when it comes to loan repayment, many have defaulted.