End of cheap money as banks raise interest rates

This end marks the start of not just costlier loans to customers but also higher domestic interest rates on government borrowing.

On Monday this week, Equity Group announced it had received CBK’s nod to implement the new pricing regime, setting a one-off loan charge of between 13 and 18.5 per cent to its clientele.

With other banks set to get similar approvals over the course of this year, the implementation of the risk-based lending rate is likely to lift the current average lending rate above December’s mean of 12.16 per cent.

Nevertheless, should all banks follow Equity’s one-off loan charge model, the total cost of credit is likely to go unchanged with the elimination of fees and levies such as negotiation fees and appraisal charges going away.

Even if the average lending rate is to rise, the outcome could be costlier but available credit with banks now able to price in more customers for loans.

“The risk-based pricing mechanism allows everyone to play irrespective of their risk. We now have no excuse of leaving anyone behind because we can price risks within a reasonable range,” said Equity Group Managing Director James Mwangi.

Meanwhile, analysts at Sterling Capital expect the implementation of the risk based pricing on loans to lift private sector credit as banks accommodate a broader and diverse range of borrowers.

Private sector credit growth has not touched a double digit rate of growth since June 2016 partly as a factor of the introduction of interest rate caps in September of the same year and the effects of the COVID-19 pandemic.

“We expect private sector credit growth to improve going forward, with a high likelihood of exceeding the double-digit range in the cause of the year as businesses have greater access to credit,” noted the analysts.

On the government front, the release of more funding to the private sector is expected to set off competition for funds, a scenario expected to weigh on the Treasury yield curve resulting in higher domestic interest rates on government borrowing.

“The news signals a rise in domestic debt interest rates with the government now having to compete with the private sector for bank capital,” added analysts from Sterling Capital.

Despite the end of interest rate caps on commercial bank lending in November 2019, banks have been unable to lift interest rates through the risk-based pricing of loans as they lay in weight for CBK’s nod.

For the banks, the green light is expected to set off greater lending lifting net interest margins for the commercial lenders.

At the same time, banks are pushing for the return of charges to transfers between customer accounts and their mobile money wallets which will lift non-interest income margins if approved.

The better prospects for the banking industry are expected to anchor greater investor interest in banking counters at the Nairobi Securities Exchange (NSE).