Following the raised benchmark for interest rates by the Central Bank of Kenya (CBK), on September 29, 2022, various commercial banks in Kenya have increased their lending rates by up to 1.1 percentage points which will be effective from the end of November 2022.
From the rates reviewed by Money254, the highest lending rate is 15.7% and the lowest lending rate is 7.02%.
Several commercial banks have, nevertheless, opted to retain old interest rates in what could be a move towards increasing the competitiveness of their products.
These are the banks' loan products and the new rates so far as established by Money254;
In addition to the interest rate, loans typically attract additional charges such as processing fees and third party charges such as credit life insurance that combined make up the total cost of borrowing.
While interest rates are a significant factor for most people when applying either for a personal loan, business loan, digital loan, logbook loan, or auto finance, there are other factors as well that impact the total cost of your loan. What this means is that a low-interest rate may not necessarily imply a low total cost of your and vice versa.
While most commercial banks' interest rates will be within a fair range, the overall cost of obtaining the same loan amount may vary substantially from one financial institution to another when additional costs are considered.
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The charges include:
Money254 helps you make a loan choice confidently when comparing many options by not just helping you compare the interest rates but the actual total cost of the loan (including extra fees) to understand the true implications of the decision you are about to make.
Section 36 (4) of the Central Bank of Kenya Act stipulates that the Central Bank shall publish the lowest rate of interest it charges on loans to banks and that rate shall be known as the Central Bank Rate (CBR).
Banks are then required to furnish the CBK with the markup they are going to add to the CBR for approval before marketing to customers.
For example, with the current CBR at 8.5%, a commercial bank loan charging an annual interest of 13% means the bank has added a markup of 5% to the CBR rate as the profit to be made for availing the loan to customers. The bank earns 5% interest on the loan since it also has to pay the CBK 8.5%.
Previously from September 2016, before the repealing of Section 33B of the Banking Act in November 2019, commercial banks were restricted to charging no more than 4% above the CBR.
In that period, for example, if the CBR was 8.5% as it is today, then no commercial bank would have charged customers an interest rate higher than 12.5% per annum - due to the 4% ceiling.
This rate-capping law was repealed in what proponents argued was an attempt to improve access to credit by incentivising banks to lend to lenders perceived as high risks such as SMEs and households.
Ever since the rate cap was removed, banks have been pushing for the adoption of a risk-based loan pricing model especially after the CBK stepped in administratively to stop banks from repricing their loans.
In 2022 particularly, the CBK has been under pressure from commercial banks to approve risk-based lending formulas saying that delays were constraining the expansion of credit access.
Risk-based lending simply means that a financial institution will charge a borrower interest based on their perceived risk of defaulting determined internally by the lender. Central Bank approval, however, ensures a lender only charges a restricted maximum rate to protect borrowers from exploitation.
Banks see this model as enabling for their businesses since they can now lend to more risky borrowers and the increased returns from higher interests can cover potential losses from defaults by some customers.
The regulator has certified at least 22 of the 38 commercial banks' risk-based management models as of October of this year.
Your credit history, loan-to-value (LTV) ratios, debt-to-income ratios, and other indicators connected to a borrower's entire financial picture and present obligations, may be considered by lenders to determine one’s risk profile.
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1. Money demand: Money is typically in high demand in a growing economy. Companies and enterprises in the manufacturing industry need money to invest in production operations in the short and long term. People require money to finance their homes, purchase cars, and meet other necessities. However, when an economy is struggling, businesses avoid borrowing if demand for their products is low.
In effect, they borrow less, resulting in lower demand for money. Consumers also spend less since a failing economy might lead to job loss. Other things being equal, the larger the demand for money, the higher the interest rates.
2. Inflation: All goods and commodities prices are decided by taking into account the overall price rise in the economy—inflation. This rule applies to interest rates as well.
3. Government borrowing and fiscal deficit: A fiscal imbalance occurs when government expenditure exceeds government revenue. The government must then borrow to cover the deficit. Because the government is the greatest borrower in the economy, the amount borrowed affects the demand for money, which in turn influences interest rates.
The greater the budget deficit, the more the government borrowing, and the higher the interest rates.
4. Interest rates and currency exchange rates around the world: The integration of the Kenyan economy with the global economy necessitates setting interest rates in line with global interest rate trends.
Attractive interest rates attract capital and strengthen the currency. The Central Bank of Kenya can use changes in the economy's interest rates to influence the exchange rate or it may decide to raise policy rates to signal higher interest rates in the economy and, as a result, attract capital from foreign investors.