Why banks won’t raise interest rates just yet

On the afternoon of Tuesday, November 5, 2019, Members of Parliament (MPs) defeated a motion to retain interest rate caps on interest rates charged by banks by simply walking out of house sittings.

The gesture by the legislatures would mark the repeal of the interest rate holds by banks and signalled higher interest rates on loans taken by Kenyans from commercial banks.

The Central Bank of Kenya (CBK) was however quick to place checks on interest rate changes by banks by developing 2019 Kenya Banking Sector Charter in what appeared as the reserve bank’s intervention to prevent a free reign by bankers.

To adjust interest rates, commercial banks were required to put in place a risk-based pricing mechanism assigning different interest rates to different borrowers based on customers’ inherent risks.

To date, banks are still fine-tuning their risk based pricing models as the CBK prolong approvals to the new pricing regime.

Nevertheless, recent recipients of the nod to implement risk based pricing have been slow to make the change as they factor the deterioration of the operating environment worsened recently by the effects of the Russia-Ukraine war including high commodity prices and weakened spending power.

Equity Group which for instance got the nod to set its maximum interest rate at 18.5 per cent has charged no more than 13 per cent on loans disbursed in the first six months of the year.

“Customers are coming under a lot of pressure in terms of being able to survive. A reprice of loans in the prevailing environment may not be the best play. We are keeping our interest rates low as we monitor the macroeconomic environment,” said Equity Group Head of Financial and Regulatory Reporting Mary Nteere.

Absa Bank Kenya which has just received the greenlight to implement risk based pricing also reads from the same script with its Managing Director Jeremy Awori stating higher interest rates at this time would be distasteful for the industry.

“The reality is that, the current environment is very different to when we first applied for risk-based pricing. In an ideal world, we do not want to charge higher interest rates than we need to,” he stated.

The bank charged an average 10.7 per cent for its loan book through the half year stage to June.

Other tier one banks such as Stanbic Bank Kenya and the KCB Group meanwhile await for the regulatory nod to operate risk-based loan pricing.

However, KCB Group Chief Finance Officer Lawrence Kimathi says the bank is likely to only apply risk based pricing to new loans.

“You’ve got to take into account that customers are also stretched. When you get risk based pricing and lift interest rates by say three per cent, that will play into your non-performing loans (NPLs) where you will just be pushing the problem down the road,” he said.

“I suspect most banks will just apply risk based pricing to new loans and not just the old loan book.”

Interest rates have nevertheless increased marginally from increased uncertainty and signalling from the CBK through the lifting of its benchmark lending rate by half a per cent to 7.5 per cent in May.

Data from the lender of last resort shows the average commercial bank lending rate stood at 12.27 per cent at the end of June, the highest rate in 27 months since January of 2020.

The rate is nevertheless 0.25 per cent or 25 basis points up from 12.02 per cent in June 2021 representing a two per cent rise in average interest rates year over year.