Bank lending rates hit a 27-month high in April as wholesale deposit costs rose following competition for funds between lenders and the government, setting up expensive credit for homes and businesses. businesses in a recovering economy.
The average lending rate rose to 12.2% in April – the highest level since January 2020, according to data from the Central Bank of Kenya (CBK).
Expensive credit comes at a time when the economy is seeing increased demand for loans amid the recovery from the economic woes of Covid-19, putting further pressure on lending rates.
Lenders are linking rising interest rates to an increase in Treasury bill rates in recent months as more banks consider raising base rates amid an economic backdrop where the state is n does not have full control over loan prices.
Increased government borrowing in the domestic market pushed benchmark 91-day Treasury yields to 7.86% from 6.86% in June last year, forcing bankers to match it to try to encourage the largest depositors to leave their money with the banks instead of lending to the State.
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This forced banks to raise wholesale deposit rates and ultimately pass the extra costs on to consumers in the form of expensive loans.
“The interest rate on deposits from our wealthy depositors is going up because of treasury bills as we compete with the government for funds,” said the CEO of a major bank. business daily while seeking anonymity for fear of reprisals from the CBK.
“Treasury bills are rising and the industry faces pressure to increase lending on the high cost of deposits.”
Banks use a base rate which is normally the cost of funds plus a margin and risk premium to determine how much they charge a particular customer.
They are reviewing base rates and many have called on the Central Bank of Kenya to revise the risk premium upwards in what could end the era of cheap credit.
Six banks have received regulatory approvals for risk-based lending.
The CBK signaled the high interest rate regime when it raised its benchmark interest rate (CBR) by 50 basis points to 7.5% during the meeting of the Monetary Policy Committee (MPC) of the May 30.
However, the higher cost of loans risks preventing businesses from accessing the credit they need to grow and therefore creating more jobs.
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In the year to April, the CBK noted that sectors that led the economy in job creation saw the strongest growth in demand and credit growth.
The manufacturing, transportation, trade and consumer durables segments recorded credit growth of between 11% and 20%, generally outpacing the industry average of 11.5%, but this performance is now under threat if rates were expected to rise further.
Notably, average credit growth remains below the 12-15% range that the CBK considers ideal for fueling healthy growth in the economy.
The increase in domestic borrowing should influence short-term lending rates.
The government plans to borrow some 662 billion shillings domestically in the new fiscal year starting July 1, compared to 540 billion shillings for the current period.
Analysts say rising rates on government debt securities are forcing banks to also boost yields on large-scale deposits from cash-rich companies and wealthy investors like pension plans.
Ultimately, this puts more pressure on lending rates, as deposits from large savers influence loan pricing.
Along with 91-day Treasury bills, other government securities have also seen significant rate increases over the past few weeks.
The rate on 364-day Treasury bills, for example, rose to 9.95% at the recent auction, from an average of 7.51% a year ago.
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“Furthermore, the government’s relentless domestic borrowing continues to negatively impact credit to the private sector,” the Parliamentary Budget Office (PBO) said in a January report.
Cash-rich companies and wealthy investors have recently pocketed huge interest income on wholesale deposits from commercial banks.
Retail savers, however, are unlikely to make significant gains in the current market environment as their rate of return has remained at around 2.5% since banks increased their reliance on wholesale deposits to back up their lending. .