President William Ruto's administration, on Monday, June 26, raised the lending rate from 9.50 per cent to 10.50 per cent.
The government attributed the increase to inflationary pressure, elevated global risks and their potential impact on the domestic economy.
According to Ruto's administration, inflation increased to 8 per cent in May from 7.9 per cent in April due to the high prices of fuel, food and other non-food items.
"The committee will closely monitor the impact of the policy measures as well as developments in the global and domestic economy and stands ready to take further action as necessary," the regulator announced.
According to experts who spoke to Kenyans.co.ke, the directive will affect borrowers acquiring various products and services from financial institutions on credit.
Consequences
Renowned economist Vincent Kimosop told Kenyans.co.ke that individuals with mortgages or loans have a valid reason to be concerned by what these changes mean for them.
He confirmed that all financial institutions will hike the lending rates thus affecting Kenyans servicing and accessing credit. Kimosop, however, underscored the need to raise the lending rate emphasising that it was key to protecting the government from inflation shocks.
Moreover, he added that the directive will increase investments in government securities thus injecting more money into the economy.
"The cost of credit is going to be affected. It will also increasingly make investments in government securities more and more attractive which will also be one way the government will use to mop out excess liquidity from the market," Kimosop explained
Javas Bigambo, a governance specialist and political communication strategist, concurred with Kimosop explaining that the directive will scare off those seeking bank loans.
Bigambo argued that the high-interest rates imposed on credit will also lead to high default rates in the country, which will, in turn, affect the performance of financial institutions.
"Due to inflation, commercial banks will adjust their lending rates upwards. The consequential effect is that loans are going to be slightly more expensive. It means that such facilities will be out of the reach of most people who want to access such credit facilities," Bigambo observed.
He, also, debunked reports claiming that employed Kenyans will be affected following the proposed changes adopted in the Financial Bill 2023, which President Ruto assented to into law on Monday, June 26.
According to the governance expert, those accessing bank products on credit will feel the heat of the directive.
"This won't affect other deductions suggested by the government. It, therefore, cannot affect deductions on persons who are employed," Bigambo explained.
The implication of President William Ruto signing the Finance Bill into law is that employed Kenyans starting in July, will fork out 1.5 per cent from their salaries to fund the affordable housing programme.
On Monday, June 26, Ruto hinted at raising the National Health Insurance Fund (NHIF) contributions to 2.75 per cent of their gross salary.
The directive will affect Kenyans earning more than Ksh35,000, while self-employed Kenyans whose 2.75 per cent of their gross income is less than Ksh300, will have their contributions capped at Ksh300.
