Kenya: CBA's Interest Rate Raise Signals Climb in Cost of Loans

The Commercial Bank of Africa (CBA) has raised its interest charge on loans by 1.5 per cent, signalling a possible surge in the cost of debt as other lenders adjust their base rates to safeguard their profit margins.

The bank has raised the minimum lending rate on shilling denominated loans to 14.5 per cent from 13 per cent effective from July 11.

The revision puts CBA's lending rate above the industry average of 13.92 per cent according to the Central Bank of Kenya (CBK's) data.

CBA's revision comes barely three months after it had reviewed the rate downward by one per cent in a bid to grow its loan book and increase interest income.

"This is a normal revision that has taken into account the changing circumstances in the market. The recent shift in short-term rates as well as the Central Bank Rate (CBR) and cash reserve requirement revision have been considered in this shift," said Jeremy Ngunze, the CBA group head of business management.

The Monetary Policy Committee of the CBK in its end of May policy changes continued with monetary tightening stance increasing both the CBR and the proportion of deposits that banks hold with the regulator by a quarter percentage points.

"These would have the effect of increasing the cost of funds for banks. The individual banks would therefore need to make strategic decisions on the way forward of either increasing lending rate to protect the margin or maintain lending rate and go for marketshare," said the industry lobby Kenya Bankers Association CEO, Mr Habil Olaka.

With the average interest payment on deposits stuck at 3.47 per cent, banking are earning a margin of 10.45 per cent.

The Central Bank has reviewed the monetary policy rate upwards by half a percentage point since the time of the March downward revision by Commercial Bank of Africa.

Banks responding

The regulator raised the rate to six per cent from 5.75 per cent in March and followed it up with a 0.25 basis points increase at the end of May to settle at the current 6.25 per cent.

"Because of competition for deposits and rising inflation the deposits rates have risen in the last three months. There is usually a lag time before banks can respond, so they could be reacting to that," said Alex Muiruri a fixed income dealer at African Alliance Investment Bank.

There is expectation for the interest rates to rise across the industry due to CBK actions, a weakening shilling and high inflationary pressures.

"With inflation rates going up the treasury bill rate has also been going up as CBK sought to mop out the liquidity," said Ashif Kassam, the managing partner at consulting firm RSM Ashvir. "What remains to be seen is whether the rise in interest rates will be proportional to that of deposit rate," he added.

In the last auction investors bought the treasury bill at nine per cent with the result being the Central Bank raising Sh17 billion five times more than it had targeted.

"The budget deficit also signals more borrowing by the government which could crowd out the private sector," said John Kamunya an analyst with Dyer and Blair Investment Bank.

High illiquidity has seen banks borrowing more from the punitive central bank emergency window at a rate of 6.25 per cent while the interbank rate stood at 6.21 per cent.

The borrowing from the two sources was almost equal with Sh16.9 billion borrowed through the interbank window and Sh16.7 billion borrowed through the emergency window as of Monday this week, a figure that analysts said was "higher than average."