Cost of loans hits 25 month high

The average lending rate charged on commercial bank loans touched a 25-month high 12.2 per cent, the highest rate since January 2020.

This is according to new data from the Central Bank of Kenya (CBK) which signals a steady rise in the cost of borrowing over recent months.

The average lending rate for commercial banks loans has for instance steadily moved north of the 12 per cent mark since January last year after sliding to a low 11.75 per cent in September of 2020.

The rising cost of loans is two pronged with rising borrowing cost for the sovereign (government) being the first factor to trigger higher interest rate.

The cost of loans charged by commercial banks is usually pegged on the sovereign risk which has steadily increased with the 364-day Treasury bill yield for instance recording a 28 basis points hike from the start of the year to 9.75 per cent.

The cost of loans is expected to see a second-round lift from a hike in the Central Bank Rate (CBR) which had been unchanged at seven per cent since April 2020 at a flat seven per cent.

Last month, CBK lifted its benchmark interest rate to 7.5 per cent, a first hike in nearly seven years, setting the stage for a further increase in the cost of loans from commercial banks.

The CBK is widely expected to further hike the benchmark rate in an attempt to contain rising inflation and in line with action from other major Central Banks around the world.

Higher interest rates are however expected to incentivise Kenyans to hold money in accounts as commercial banks lift the average return offered for holding funds in savings accounts.

The average savings rate offered by commercial banks stood at 2.56 per cent in April.