It all started with a 150 basis point rise in April to cushion the shilling. Six months later, and 300 basis points higher, the shilling had steadied but the effects of saving it is now threatening to bring down consumers.

This is after several banks hiked their lending rates in an effort to protect their profit margins. The rates have gone up by as high as 12 per cent for some clients, setting them up for default, repossession and foreclosures for those with mortgage facilities. The ghost of the high interest rates of 2011 is back.

Moses, a customer with Barclays Bank, has already received a notification informing him of a rise in the rates on both his credit card facility and personal loans.

“I received the first notification on my $20,000 loan in July. Last week I got another notification on both my loan and now the credit card facility. My loans officer has informed me that the rates are now pegged at 24.5 per cent. I will be paying an extra $100 every month on top of my current premium, translating into an extra payment of $4,000 once I am done with my loan. This is not the kind of news you would want to receive,” said Moses.

Florence, a publishing executive, has also received an email from Standard Chartered Bank informing her of changes in her interest rates from 17.5 per cent to 27 per cent effective November 19.

In the email, the bank said the changes are due to the prevailing challenging economic conditions and subsequent tightening of monetary policy by the Central Bank of Kenya.

Florence laments that the change will affect her earnings and knock her off the mortgage facility that she is three months into servicing.

“I am at loss. I either have to buy out the loan, or give up on my mortgage. It’s very painful to be lumped with a more than six per cent interest increase on a month’s notice. It’s not like I have had an increase in income,” she said.

Last week, a Nairobi-based Chinese developer had his overdraft facility of $10 million reduced by half, and his $30 million loan negotiations on a new project put on hold after the bank informed him of its intention to use a new interest rate of 28 per cent instead of the earlier 19 per cent for the housing project.

This is the dilemma facing customers as banks adjust their lending rates. The respective banks have already notified their clients about an impending increase in the rates next month, in line with the new banking regulations that require them to issue a month’s notice to clients before effecting any increase. The banks are justifying the increase because of the doubling of the cost at which the government is borrowing from the local market.

Both the Treasury and Central Bank appear helpless, with little room for immediate policy manoeuvres to help the trapped consumers. Previously, the Kenya Bankers Reference Rate (KBRR) was touted as a tool that would limit such steep increases but this seems to have failed.

Unfair hike

Treasury Cabinet Secretary Henry Rotich said banks should not punish consumers with what he termed as “unfair hikes” in rates.

“From the market dynamics, the banks’ move to substantially hike the rates isn’t justified. Even with the rates averaging 15 per cent, these banks will still make handsome margins,” said Mr Rotich.

Central Bank Governor Patrick Njoroge also lamented the hike, saying that it wasn’t in line with the changes in the Central Bank Rate.

“We have seen the market respond by hiking their interests more than the 300 basis points we raised the CBR by. We are working on a mechanism that will engineer all the interest rates down gradually. We don’t want to create a shock in the market with a sudden slash,” said Dr Njoroge.

Analysts are warning that those who have taken bank loans are likely to suffer the most as the banks adjust loan products to retain their margins.

Eric Munywoki, an analyst at Old Mutual Securities, said Kenya was looking at a high interest rates regime, with a lot of loan re-pricing.

Analysts at Cytonn Investment said the increase in cost of borrowing and no increases in disposable incomes, will see banks record above average non-performing loans on the already issued facilities.

“Higher interest rates will result in an increase in the cost of borrowing, owing to higher interest payments on loans and mortgages. This will lead to higher interest obligations for individuals who already have loans, reducing their disposable income and consumption as well,” said Cytonn analysts.

In 2011, Kenya’s central bank raised interest rates to 16.5 per cent in an attempt to tame runaway inflation, which had reached 18.31 per cent.

Currently, the benchmark rate stands at 11.5 per cent, while the inter-bank lending rate is at 15.06 per cent. Banks are charging borrowers an average of 15.26 per cent before adding the Kenya Bankers Reference Rate of 9.87 per cent, pushing the average lending rate to more than 24 per cent.

In Uganda, the benchmark rate stands at 17 per cent, the inter-bank lending rate is 21 per cent and the banks are charging 23.5 per cent on their loans. Rwanda has not seen any changes in its interest rates regime with the average lending rates for banks currently at 17.2 per cent. The yields on its 91 and 182-day Treasury bills stand at 4.2 per cent and 4.56 per cent respectively.

Kenya Bankers Association chief executive Habil Olaka said the banks’ decision to raise the rates is driven by an individual bank’s premium factor and the cost of credit.
“We all understand that the CBR has gone up. In line with this, it is imperative that the banks also increase the costs of credit,” said Mr Olaka.

In Uganda, last week’s new CBR will definitely push the rates higher as banks factor in their margins. Uganda increased its benchmark lending rate to 17 per cent.

In September, CFC Stanbic Uganda increased its rates to 23.5 per cent up from 22 per cent. Both ABC Capital Bank and Diamond Trust Bank raised their prime lending rate from 21 per cent to an average of 23 per cent.

George Mulindwa, a portfolio manager at Stanlib Uganda, said the benchmark rate increase will raise the average prime lending rates to a range of 25-26 per cent as banks factor in the latest rate increase.

“In future, we are probably going to see the rates averaging 24.5-25 per cent,” said Mr Mulindwa.