Co-op Bank stuns market with rare loan interest rate cut

Co-operative Bank headquarters, Nairobi. [David Njaaga, Standard]

Tier one lender Co-operative Bank of Kenya (Co-op Bank) has cut its loan interest rate by one percentage point, stunning the credit market as rivals race in the opposite direction to hike rates.

In the move that comes as huge relief for its credit-reliant borrowers amid a biting cash crunch, Co-op Bank said it had slashed personal loans and asset finance lending rates to "selected key borrowers"from 14 per cent to 13 per cent per annum with effect from April 1.

The reduction in lending rates will benefit customers who have maintained good credit record over time, the lender said in a statement on Thursday.

Co-op Bank cited the check-off personal loans to key institutional employees including teachers, security agencies and other State corporations who borrow against the strength of their payslips and are perceived to be less risky.

"Co-op Bank's reduction of the lending rate is the bank's response to the good loan repayment record and reduced default risk that the target check-off scheme loans have recorded over time," the lender said in a statement.

"It is a deserved reward for customers who have maintained a consistently good credit record."

According to the lender, among the main beneficiaries of the new lower rates are key corporate and institutional employers including the Kenya Defence Forces and other armed services, the National Police Service, the Teachers Service Commission, government ministries and State corporations such as Kenya Revenue Authority, the National Assembly and electricity producer KenGen.

The reduction in lending rates bucks the industry trend where majority of the lenders are revising lending rates upwards.

The bank added it is working "to extend this benefit beyond the current target customer segments namely personal loans and asset finance, to include all borrowers with good credit history."

Co-op Bank has cut its loan interest rate by one percentage point. [File, Standard]

The cut is expected to pile pressure and put spotlight on rivals in light of the recent upward adjustment of Central Bank of Kenya (CBK) key lending by a huge 75 basis points to 9.5 per cent.

Banks have been steeply increasing the cost of loans with interest rates of up to 19 per cent, leaving their customers with a massive debt servicing burden.

This follows the widespread adoption of the risk-based rating of loans by a majority of the country's nearly 40 banks.

The increments come at a time when the high cost-of-living is already squeezing Kenyans hard.

The repeal of the interest rate cap regime in November 2019 set the stage for price hikes for borrowers.

Borrowers are staring at costlier loans after the CBK raised its policy lending rate - the highest in almost five years - in a bid to stem rising inflation and stabilise the weakened shilling.

The Monetary Policy Committee (MPC) last month cited the persistent rise in prices of goods and services and the elevated global risks and their potential impact on the domestic economy, as some of the major reasons for tightening the supply of money.

"The MPC noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy, and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations," said MPC Chairman and CBK Governor Patrick Njoroge said in a statement after the committee's meeting last month.

"In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 8.75 per cent to 9.50 per cent."

The key lending rate was set at a similar point in May 2018.

The tightening of liquidity by the inflation-targeting MPC is expected to have a negative effect on access to credit for individuals and companies.

The prices of key food items have climbed significantly over the past couple of months, adding pressure on cash-starved households that are still reeling from the economic hit of the Covid-19 pandemic.

Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit offered or extended to a particular consumer to reflect the risk of nonpayment of their loan by that consumer.

Information from a consumer report is often used in evaluating the risk posed by the consumer.