Equity is the first bank to increase loan interest rates to take into account the new CBK rate.
Equity Bank, Kenya’s most profitable bank, has announced an increase in loan prices following the Central Bank of Kenya’s (CBK) announcement of a new benchmark rate. Starting from Monday, customers will pay higher interest rates on their loans. Equity Bank will adjust its lending rate to 14.69 percent, up from 12.5 percent in January. The new rate will be the Equity Bank Reference Rate (EBRR) of 14.69 percent plus a margin based on each customer’s credit risk. Some customers may see their total interest rate exceed the maximum of 21 percent announced earlier this year.
The increase in loan prices comes after the CBK raised the central bank rate (CBR) from 9.5 percent to 10.5 percent, the highest level in nearly seven years. Other banks are expected to follow Equity Bank in raising the cost of loans, as banks shift towards a risk-based pricing regime. Under this regime, different consumers are charged different interest rates based on their estimated risk of loan default. While risk-based lending has increased the cost of credit for most borrowers, it has incentivized banks to lend more as higher returns help cover the risk of default.
Kenya’s banking sector is facing challenges, with loan defaults increasing and the non-performing loans (NPLs) ratio reaching a 16-year high. In just four months of the year, borrowers have defaulted on an additional Sh82.9 billion in loans. The NPLs ratio rose to 14.9 percent in May, up from 13.3 percent in December. The stock of bad loans has also increased, reaching Sh570.6 billion in April. The rise in loan defaults indicates the economic struggles faced by borrowers and poses challenges for the banking sector.
Overall, the increase in loan prices by Equity Bank reflects the impact of the CBK’s new benchmark rate. As other banks are expected to follow suit, borrowers will face higher interest payments. The challenges in the banking sector, including rising loan defaults and non-performing loans, highlight the economic difficulties faced by borrowers and the need for risk-based lending practices to manage credit risk.