HOUSEHOLDS, SMALL BUSINESSES SUFFER HIGH COST OF BORROWING
”We hope that when inflationary pressure eases in the coming months, CBK will act fast and reverse its tight monetary policy stance,” said Edward Gitahi senior investment manager

BY JACKSON OKOTH

Fredrick Chumo, a software specialist in one of the leading IT firms in the country, is a worried man and under intense financial pressure. This is after receiving a letter from the bank, advising him that his monthly loan repayment has been adjusted upwards.
Chumo, who has been repaying his loan at the rate of Sh 15,000 per month, will now have to top up this amount to Sh 25,000. He took out a Sh 100,000 unsecured loan from a retail commercial bank, using his payslip as security. While this loan was supposed to attract an interest of 15 per cent, the bank has pushed this up to 25 per cent.
“The bank says this upward adjustment in repayment rate is in response to a recent hike in Central Bank Rate to 16.5 per cent,” said Chumo.
He is in a class of most middle and low income earners, who are struggling to repay their loans. Even those who were previously thinking of approaching a bank for financial help have fled for the hills.
“For those borrowers who took up loans that have variable interest rates, there is growing pressure to service this debt as banks hike their base lending,” said Edward Gitahi, senior investment manager, PineBridge Investments Limited.
High lending rates have also hit the profit margins of several businesses, most of whom will have no option but to pass this extra cost to consumers.
“There are those ongoing projects whose rate of return is much lower than cost of financing. These may have to be abandoned or work interrupted as cost of credit increases,” said Gitahi.

In recent weeks, a number of commercial banks have raised their base lending rates, the highest hike being that of Equity Bank at 25 per cent up from 15 per cent. This is in reaction to a decision by the monetary policy committee (MPC), a top policy organ of the Central Bank of Kenya (CBK) to increase the Central Bank Rate (CBR) from 11 per cent to 16.5 per cent.

“This steep rise in base lending rates will result in a significant slowdown in new loans uptake. Only short-term borrowers, who mostly engage in cash –only business, are unlikely to be affected by the rate hikes,” Gitahi.

Also hit by expensive credit those firms which do business on credit. These companies are currently experiencing a pile up in the number of debtors on their books.

In the coming month, CBK is not expected to raise the CBR further as the new cash reserve ratio takes effect.

”We hope that when inflationary pressure eases in the coming months, CBK will act fast and reverse its tight monetary policy stance,” said Gitahi.

Already, the interbank rate has risen above 30 per cent. This is an indication that the CBK measures are working.

“We expect high default rates in the banking industry as the mostly low income borrowers find it hard to repay their loans,” said Cynthia Omondi, an analyst at African Alliance.

Those commercial banks with strict credit rules such as Barclays are expected to shy off from lending any further to the private sector, due to rising default risks.

A move by CBK to increase the Central Bank Rate from 11 per cent to 16.5 per cent has had the effect of reducing the amount of liquidity and cash available to banks.

“The effect of this monetary policy adjustment is going to be felt by banks in the fourth quarter and probably the first months of next year,” said Omondi.

In the third quarter, most banks recorded an increase in their loan books, customer deposits and interest income, a situation that is bound to change in the last quarter.

Official data from the Central Bank Kenya indicates that spreads on commercial bank loans remained above
10 per cent throughout the year, reflecting high risk perception by banks. Market data also indicates that most banks consider the risk of loan default to be the highest at the bottom of the market and for short term loans.


GLANCE BOX

• The monetary policy committee (MPC) recently increased the CBR by 550bps to 16.5 per cent.
• Inflation has continued to rise unabated to 18.9 per cent) in October, with persistent exchange rate volatility.
• The MPC has decided to tighten monetary policy by raising the Cash Reserve Ratio 50bps to 5.25 per cent, effective 15 December 2011.