Kenyan Borrowers To Repay Loans At Higher Interest Rates

Tough times are ahead as Kenyan borrowers set to repay loans at higher interest rates after banks raised alarm at the increasing rate of loans default.

According to Commercial Banks, they have reached out to the Central Bank of Kenya, urging the regulator to reprice the cost of loans based on borrowers’ risk and increase risk premium.

Central Bank of Kenya (CBK) is set to issue the green light for the repricing according to a report released by Investment Bank EFG Hermes. This will see an increased rate spread, which remains after banks deduct what they pay for deposits from what they earn from loans.

According to Nicholas Gachara, a financial analyst based in Nairobi said that banks are worried and unsure of issuing more loans to the public as the increasing defaulting rate has affected profit margins.

Defaults were accelerated by Covid-19 and the closure of the economy. In August 2002, CBK stated that defaulted loans in Kenya rose by 30 billion shillings between March and June 2020.

The amount of restructured loans has more than tripled since April when only seven percent of the banking sector loan book or 176 billion shillings was rescheduled following CBK’s directive. It has also more than doubled compared to May.

According to the Central Bank of Kenya (CBK), at least 844.4 billion shillings of loans were restructured by end of June, in line with the emergency measures announced by the apex bank on March 18, to cushion borrowers from the adverse effects of Covid-19

According to CBK, personal loans worth Sh240 billion accounted for 30 percent of gross restructured loans, an indication of just how the Covid-19 pandemic has hampered income for households.

The loan restructuring directive extended some relief to banks by the lowering of the commercial bank cash reserve ratio to 4.25 percent which saw CBK set aside 35.2 billion shillings cash flow to banks.

The risk pricing model was one of the conditions banks were given after the repeal of the interest rate cap in 2018. It considers various factors like the borrower’s credit rating and the probability of default.

According to the regulator, the non-performing loans ratio was 13.1 percent in June compared with 13 percent in May.

The pandemic had no impact on lenders’ earnings in the first three months of the year but projected effects to reflect in the half-year results expected this month.

READ: Trouble For Borrowers As Banks Resume Listing Defaulters On CRB