Borrowers are set to feel the pinch after the Central Bank of Kenya (CBK) started the process of approving banks' requests to raise the cost of loans.
The majority of those who will be affected are Kenyans and sectors that easily default on loans, with banks getting the greenlight to analyse customer risks before issuing loans.
Banks now have the opportunity to surpass the average of 13.5 per cent interest on loans and can go up to 18.5 per cent depending on the customer's risk levels.
However, the local financial institutions will only add risk elements in their lending formulas upon CBK approval. CBK has been holding one-on-one discussions with each bank to determine their statuses.
So far, only one bank has announced that it was given the green light by CBK to raise the cost of loans.
Those projected to be most affected by the changes are Small and Medium Enterprises (SMEs), individuals and entities seeking unsecured loans.
The latter will attract higher interest than the former.
Reports indicated that CBK approved the increase in the cost of loans after the International Monetary Fund (IMF) stepped in to negotiate for the local financial institutions.
Local banks reached out to IMF in 2021 when CBK declined to raise the cost of borrowing. This also came one year after CBK scrapped interest rate controls in November 2019.
The CEOs of the country's leading financial institutions complained that Kenya’s main monetary authority favoured a customer protection approach rather than safeguarding the banks.
This forced the local banks to invest more in government securities and only offer risks to high-quality customers.
They also argued that they were left exposed to high defaults for loans taken pre and during the pandemic.
