Push to raise loan rates likely to get nod by year-end

Kenyans might start paying high interest rates for their loans as early as next month.

This is in the wake of reports that the Central Bank of Kenya (CBK) will finally allow banks to reprice borrowers’ risk.

This will see an increase in interest rate spread - what remains after banks deduct what they pay for deposits from what they earn from loans - according to a report by Investment bank EFG Hermes.

Despite scrapping the interest rate cap, borrowers have continued to enjoy favourable lending rates at a record low of 11.94 per cent.

EFG noted that after incessantly knocking on the doors of CBK with fresh requests for risk pricing models, banks might finally get their wish by the end of the year.

The risk pricing model, which was one of the conditions banks were given after the repeal of the interest rate cap in 2018, takes into consideration various factors, including borrowers credit rating and the probability of default.

Unlike before, banks cannot arbitrarily raise interest rates.

EFG noted that most of these requests had not been approved by the end of the first half of this year. This has seen banks’ net interest margin continue to shrink.

This is in contrast to expectations that the repeal of the interest rate caps would see banks’ margin on interest charged on loans widen as lenders moved into a liberal interest-setting environment.

“But our discussions with management indicate that they expect them to be approved by year-end,” read part of the EFG report, noting that banks expect to increase their net interest margins by between 100 and 150 basis points from the first half should the repricing models be approved by the regulator.

The small margins, said EFG, was among the factors that prevented banks from being profitable and hence affecting the earning price per share of listed lenders’ stocks at the Nairobi Securities Exchange (NSE). “Potential delay or outright rejection of the risk pricing models could lead to margins remaining low for longer than expected,” said the report.

As of October 27, EFG noted, the average share price of Kenyan banks had fallen 31.6 per cent year-to-date compared to a decline of eight per cent for its peers.

Habil Olaka, the chief executive of the Kenya Bankers Association (KBA), a lobby for commercial banks and microfinance banks, said he could not comment on the issue as every request is made by the individual banks rather than through the association.

“The engagement is at the individual-bank level. We are not party to it,” said Mr Olaka.

However, the risk pricing model, which includes repricing of interest rates, if approved might hit Kenyans hard. Analysts fear the move would increase the risk of default by distressed borrowers who had received repayment holidays.

“Default rates will also depend on the trajectory of the pandemic and rebound in economic activity. Our models, implicitly assume 10 to 15 per cent of the restructured loans will become NPLs (non-performing loans),” said Ronak Gadhia, one of the authors of the report.

EFG further explained that there were still elevated risks in the medium-term for the restructured loans to become NPLs.