Banks Increase Loan Interest Rates on T-bills Interest

An increase in short-term treasury bills’ interest rates has prompted banks to raise their loan pricing, resulting in more expensive credit for homes and businesses in a recovering economy.

To calculate how much a customer is charged, banks use a base rate, which is typically the cost of funds, plus a margin and a risk premium.

They are currently evaluating base rates, and several have applied to the Kenyan Central Bank to increase the risk premium, potentially putting an end to the era of cheap credit.

The 91-day T-bill rate breached the seven percent mark on March 8 and has risen to the current high of 7.13 percent, from an average of 6.23 percent in the quarter ended September last year.

Average lending rates by banks also rose to 12.02 percent in February from a low of 11.75 percent in September.

In the short term, increased domestic borrowing is likely to affect lending rates. In the new fiscal year, which begins on July 1, the government expects to borrow Sh662 billion from the domestic sector, up from Sh540 billion in the current fiscal year.

According to analysts, rising interest rates on government debt securities are pushing banks to raise interest rates on huge deposits from cash-rich companies and high-net-worth investors such as pension funds.

Since large savers’ deposits affect loan pricing, this puts upward pressure on lending rates.

“Furthermore, the incessant government borrowing in the domestic market continues to have a negative impact on credit to the private sector,” the Parliamentary Budget Office (PBO) said in a January report.

The PBO also stated that private sector credit uptake remains low, citing “either low private sector demand for credit or “cautious lending” by commercial banks as reasons.

In an environment where the government is not regulating loan prices, the Central Bank of Kenya has asked banks to apply new loan pricing formulas that will be used to fix interest rates on new credit.

CBK has, however not approved the submissions and this has forced banks to continue working as if they are under lending rate limits to avoid getting in trouble with the regulator.

According to banks, the slow transition to risk-based lending has prompted many of them to increase their investment in government assets and limit lending to high-quality customers with low default risk.