The Central Bank of Kenya (CBK) announced an increase in the Central Bank Rate (CBR) from 10.50 percent to 12.50 percent, a whopping 200 percent jump in base points. This has left tongues wagging given that the last time the Central Bank Rate was above 12 percent was in September 2012 at 13 percent, 11 years ago.
The Monetary Policy Committee (MPC) noted that sustained inflationary pressures, increased risks to the inflation outlook, elevated global risks, and their potential impact on the domestic economy call for tightening of the monetary policy. Inflation for May increased marginally by 10 basis points to eight (8) percent, a rise from the 10-month low of 7.9 percent recorded in April.
“There is a need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second-round effects… This will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5.0 percent mid-point of the target range,” said the Monetary Committee Policy in a statement.
Inflation dipped to 6.8 percent year-on-year in November from 6.9 percent in October, with the central bank saying on Tuesday that exchange rate depreciation had contributed about 3.0 percentage points to the November reading. The shilling is down more than 19 percent against the dollar this year, having struck repeated all-time lows along the way.
There is no doubt that the decision by the Monetary Policy Committee (MPC), chaired by the Central Bank Governor, Kamau Thugge, carries far-reaching implications for the Kenyan economy as well as the banks and their customers.
Coming at a time when millions of Kenyans are struggling with the high cost of living occasioned by numerous and higher taxes, the highest cost of fuel; Super Petrol, Diesel, and Kerosene in history, the hiked rates are like adding salt into a fresh leaking wound for Kenyans and business entities.
First, CBR is not just like any other acronym you know. This is a crucial tool used by the CBK to influence economic activity by adjusting the cost of borrowing. As well know, millions of Kenyans and businesses roll on the wheels of borrowing and loans. There is no doubt about that.
Now, when the CBR rises with such a big margin, it becomes more expensive for Kenyan commercial banks to borrow money from the Central Bank, leading to higher interest rates for consumers and businesses. What this means is, that banks will have to also adjust their interest rates upwards while lending, hence more tears and sweating for those planning to take loans and those with already existing loans.
The immediate effect of the CBR hike is an automatic increase in borrowing costs across the board. This is without question. Interest rates will have to go up whether people like it or not. Whether one is considering a mortgage, personal loan, or business financing, higher interest rates mean larger monthly repayments.
With such higher interest rates slapped on borrowers, there is a huge possibility for a slowdown in borrowing and investment activities, affecting both individuals and businesses. With this in mind, we are likely to see businesses adopting the wait-and-see approach before taking on new projects or even completing the existing ones.
This also has the potential of increasing non-performing loans. These are loans that borrowers are more likely to delay in paying or default, hence a more likely scenario of increasing auctioneering activities during the coming days as banks and financial institutions scramble to recover what they are owed.
In the mind of the CBK, the current CBR hike will help tame the run-away inflation around the country. The CBK noted that Kenya’s overall inflation remained at 6.8 percent in November 2023, compared to 6.9 percent in October, but this is still higher than the government’s target of 5 percent.
At the same time, the weakening Kenyan shilling played a major role in the current surprise hike. There is no doubt that with proper management, the higher benchmark rate can influence the exchange rate. The MPC noted that exchange rate depreciation continues to exert pressure on domestic prices, thereby increasing the cost of living and reducing purchasing power.
All is not lost if we work collaboratively
Now, as the Swahili saying goes, the consumer hana bahati. But does this mean that all is lost? Does it mean that the consumer has no breathing space and now will be choked by the lenders? Is there something that banks can do so that the consumer has some breathing space? All is not lost. There is a lot that Kenyan banks can do to cushion the consumer.
First, there is a need for enhanced financial literacy among Kenyans. Kenyans need to be educated about the CBR and what it means when taking loans. They need to be empowered by knowledge of why taking a loan without a plan is some form of suicide.
Second, there is an urgent need to implement risk-based lending by the Kenyan commercial banks. This will ensure that people receive loans based on their ability to pay back within the stipulated time. This will sieve out those who might delay, hence averting the piling of non-performing loans.
Third, banks need to deploy measures for responsible lending. This is not the time to push for the “growing of the loan book” but to have a mechanism where a loan is given after a great analysis of the borrower and their ability to pay. This does not mean that the borrower should be abandoned, but helped through other means to navigate the process.
Last but not least, the return of the COVID-19 measures where Kenyan banks had a sit down with customers who had taken loans, and discussed the friendly repayment models that will benefit both parties without hurting the other.
What are your thoughts?