CBK Hikes Loan Interest: Expert Explains Implications Of High Cost Of Borrowing

• The Central Bank of Kenya (CBK) raised the base interest rate to a decade-high of 12.5% from 10.5%
• Kenya Institute of Bankers (KIB) Chief Executive Officer James Wanjagi noted that the move is significant in easing pressure on the shilling but will hurt borrowers
• Wanjagi highlighted the implications of the rise in interest rates to Kenyan borrowers and the economy at large

TUKO.co.ke journalist Wycliffe Musalia brings over five years of experience in financial, business, and technology reporting, offering deep insights into Kenyan and global economic trends.

Kenya's loan default rates are expected to increase following a decade-high increase in base lending rate.

The Central Bank of Kenya (CBK) raised the interest rate to 12.5%, an all-time high since 2012, when the rate hit 18%.

In an exclusive interview with TUKO.co.ke, Kenya Insitute of Bankers (KIB) Chief Executive Officer (CEO) James Wanjagi explained that the move is significant in easing inflationary and Kenya shilling pressures but will strain borrowers' budgets.

"The increase in interest rates by the Central Bank of Kenya will have a significant impact on borrowers, typically making it more expensive and challenging to access credit.

"Generally, CBK raises rates to combat economic issues biting the country. We know that the Kenya shilling has faced increasing weakness against the US dollar and other major currencies. Raising the interest rate could help support the shilling from slipping further, but it will strain borrowers' budgets," said Wanjagi.

Wanjagi noted that raising the interest rate directly and indirectly impacts the economy.

Direct impacts of high interest on the economy

1. Higher borrowing costs

The CEO explained that existing loans, such as mortgages and car loans, will become more expensive as interest payments rise.

"Normally, banks increase by 2.5 to 3 points above the CBR rate / and or above their existing rate. This will strain borrowers' budgets and potentially lead to defaults," he said.

He revealed that commercial bank customers have defaulted to close to KSh 615 billion in the last three months.

Wanjagi noted that the lenders advised CBK not to raise interest rates, citing an increase in defaults and higher Non-Performing Loans (NPLs) on their books.

2. Reduced access to credit

With the rising Central Bank Rate (CBR), individuals and businesses will find it harder to qualify for new loans.

This is due to stricter lending requirements and higher borrowing costs.

The CEO said the move will hinder investment, expansion, and consumption.

3. Decreased purchasing power

He added that consumers will have less disposable income due to higher debt payments, especially if they are repaying a loan.

"This will lead to reduced spending on goods and services and would cause a ripple through the economy, impacting businesses and overall economic activity," he continued.

Indirect impacts of high CBK rates

4. Lower asset values

The banking expert further explained that rising interest rates can make investments like stocks and bonds less attractive, leading to potential price declines.

This could impact borrowers' retirement savings or other investment portfolios.

5. Slowed economic growth

If borrowing becomes too expensive, businesses may delay expansion plans and hiring, and consumers may spend less.

Wanjagi noted that this can lead to slower economic growth and potentially higher unemployment.

6. Increased financial stress

He added that high loan interest rates pose negative consequences on the mental and physical health of borrowers.

"The combined effect of higher debt payments, reduced access to credit, and potential job losses can lead to increased financial stress for borrowers."

Wangagi, however, noted that the impact of interest rate hikes is not always negative but dependent on several factors.

What factors determine the impacts of high interest?

These factors include;

• The magnitude of the increase: Smaller hikes may have a less pronounced effect than significant jumps.

"CBK has raised the rate from 10.5% to 12.5%. That’s 2 percentage points. It will be interesting to see the commensurate increase by the commercial banks."

• Borrower's financial situation: Borrowers with strong credit history and stable incomes may be less impacted.
• Purpose of the loan: Loans for essential needs like housing may be prioritised over discretionary borrowing.
• Overall economic conditions: A strong economy with low unemployment can offset some of the negative effects.

"Kenya is not in this state currently. We see a high cost of living, higher unemployment rates like never before and a battered economy. This will definitely have an effect," he warned.

Will CBK listen to Kenyans?

Wanjagi recommended a closer look into the potential impact of raising the interest rates, which will implement supportive measures.

"While this could be considered necessary for long-term economic stability, it's crucial to consider the potential impact on borrowers and implement supportive measures where needed," he urged.

This came as Kenyans raised concerns over the move to increase the CBR.

The majority said high-interest rates will only add pressure to the already overburdened cost of living.