Kenya Commercial Banks Raise Base Lending Rates for Seventh Consecutive Month

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Kenyan commercial banks have increased their base lending rates for the seventh consecutive month, reaching 13.31 percent by the end of June. This rise in lending rates highlights the impact of Central Bank of Kenya (CBK) rate hikes and higher returns on government bonds, which together contribute to the more expensive credit environment for borrowers.

Data from the CBK reveals that the average lending rate escalated from May’s 13.21 percent, continuing the upward trend that began in December. The base lending rates, combined with other factors such as customers’ risk profiles, have led to some borrowers encountering loan rates exceeding 20 percent.

Equity Bank Kenya, for instance, raised its base lending rate from 12.5 percent in January to 14.69 percent in August. This adjustment resulted in certain customers facing total interest rates surpassing 21 percent.

The current average base lending rate is the highest since March 2018, reflecting the CBK’s consistent increases in its base rate. The CBK raised the central bank rate to 10.5 percent in June, the highest level in nearly seven years, and maintained this rate in the August review.

Equity Group CEO James Mwangi explained that the upward trend in interest rates corresponds to the pricing of government bonds. When the government issues bonds with higher interest rates, it influences banks not to set interest rates lower than those of the sovereign risk rate.

The banking sector has shifted towards risk-based pricing, where different consumers are charged varying interest rates based on their estimated repayment risk. While this approach has increased the cost of credit for many borrowers, it has encouraged banks to lend more by covering the risk of potential customer defaults.

Opinion: The continuous increase in lending rates by Kenyan commercial banks underscores the challenge of balancing economic growth with the need for controlled inflation and stable financial markets. While raising interest rates can help curb inflation and stabilize financial systems, it also poses a challenge for borrowers who face higher borrowing costs. The shift towards risk-based pricing demonstrates the importance of tailored lending rates based on individual customer risk profiles, although this can lead to increased credit costs for some. The central role of the CBK in setting the base rate and the government’s bond pricing strategy significantly influence the lending environment. This situation reinforces the delicate balance that authorities must maintain to ensure affordable credit access while safeguarding the broader financial stability of the country.


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