Kenyans to Repay Loans at Higher Interest Rates After Defaulters Increase

  • Stock image of Kenyans crossing a street in Nairobi.
    Stock image of Kenyans crossing a street in Nairobi.
    Simon Kiragu
    KENYANS.CO.KE
  • Kenyans are set to repay loans at higher interest rates after banks raised alarm at the increasing rate of loan defaults

    Commercial Banks have reached out to the Central Bank of Kenya, urging the regulator to reprice the cost of loans based on borrowers' risk and increase risk premium. 

    A report by Investment bank EFG Hermes stated that CBK is set to issue the green light for the repricing. 

    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.

    File image of Kenyan banknotes
    File image of Kenyan banknotes
    File

    Speaking with Kenyans.co.ke, Nicholas Gachara, a financial analyst based in Nairobi stated that banks are worried and unsure of issuing more loans to the public as increasing defaulting rates have affected profit margins. 

    "The interest rate cap was scrapped off and currently we do not have any law that caps interest rates. Banks were allowed to set their own interest rates after consulting CBK.

    "Repricing borrowers risk will see banks set new rates either next month (December) or by February 2021. This will affect all new loans but also banks can argue their case for old loans," Gachara explained. 

    Defaults were accelerated by Covid-19 and the closure of the economy.  In August 2020, CBK stated that defaulted loans in Kenya rose by Ksh 30 billion between March and June 2020.

    It added that non-performing loans (NPLs) rose to Ksh 379.9 billion in June, from Ksh 349.9 billion in February.

    The risk pricing model was one of the conditions banks were given after the repeal of the interest rate cap in 2018. It considers various factors like borrowers credit rating and the probability of default.

    Ronak Gadhia, an analyst based at EFG added that repricing borrowers risk will increase the risk of defaults by far, especially after CBK offered Kenyans tax reliefs during the Covid-19 pandemic. 

    “Default rates will also depend on the trajectory of the pandemic and rebound in economic activity. Our models, implicitly assume 10 to 15% of the restructured loans will become NPLs (non-performing loans)," the analyst stated. 

    In August 2020, lenders contemplated auctioning items presented as collateral by borrowers as they seek to recover the funds issued through loans. 

    Central Bank of Kenya Governor Patrick Njoroge addresses a news conference at the Central Bank's buildings on Tuesday, May 28, 2019.
    Central Bank of Kenya Governor Patrick Njoroge addresses a news conference at the Central Bank's buildings on Tuesday, May 28, 2019.
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