, NAIROBI, Kenya, Dec 13 – Commercial banks have now agreed on a number of measures aimed at cushioning existing borrowers in the wake of rising interest rates.
Kenya Bankers Association (KBA) Executive Director Habil Olaka disclosed on Tuesday that banks will cap the increase in the instalment repayment to a maximum of 20 percent of the current level of settlement.
This however means that the instalments will be spread out over several months making the repayment periods longer giving the borrowers the flexibility to settle their loans.
“The bank agreed as an industry to adjust the repayment profile of those borrowers to be able to fit within what they can be able to afford. For example, where we are going to keep the repayment instalment at the contractual amount and the interest rate has gone up, it means that the repayment period will have to be extended,” he explained.
Interest rates have risen by an average of 14 percent since October 2011 to reflect the hike in the indicative lending rate which has also increased by 11 percent within the same period.
When the first Central Bank Rate (CBR) hike of four percent to 11 percent was announced, banks quickly moved to re-price their lending rates, a move that did not augur well with many analysts.
The same trend was repeated a month later when another 5.5 percent increase signalled a second round of interest rate hike which pushed interest rate to as much as 30 percent.
But besides stifling credit to the private sector, the sharp rise in the interest rates heightens risks of default as many borrowers find it hard to service their debts.
Therefore as much as the outlined measures are meant to soften the blow of the high rates on their clients, they are also meant to protect the banks themselves from registering high rates of non-performing loans that are inevitable in the current interest rate regime.
In a bid to minimise the default rates, banks also acknowledge that they will have to absorb some of these costs and forego their profit targets.
This for instance means that banks will not raise their interest rates again to match the 1.5 percent CBR hike on December 1 as well as other subsequent increases.
“This entails sacrificing a portion of their budgeted profit margin. These measures are hinged on the premise that while short term interest rates will increase, lending rates are also driven by other factors. These factors include opportunities for investment and overpricing loans may kill avenues for investment. These factors will prevail and will be more important once the inflation war has been won,” Olaka said.
Further, banks have vowed that they will also not penalise those borrowers who might wish to settle their outstanding loans earlier than their contractual obligation states.
But seeing as there are some institutions that had already adjusted their rates, the onus will now be on consumers to negotiate better and flexible terms with their banks.
While commending the institutions that have always come out as the ‘bad guys’ who just want to make huge profits at the expense of their customers, Finance Minister Uhuru Kenyatta said that such collaborative efforts would enable the government achieve its goals of taming inflation and stabilising the exchange rate.
“We can see collaboration in place between various market players aimed at dealing with the current shocks that the economy is facing and more importantly an understanding that various institutions want to work with their borrowers to ensure that the shock to the Kenyan citizens is as minimal as possible,” Kenyatta commended.
By working together, the stakeholders would enable the country to maintain a stable macroeconomic framework that supports the envisaged economic growth.
His Permanent Secretary Joseph Kinyua saw the move particularly been beneficial to the real estate sector as well as the various households that had taken up loans with their banks.
These two groups, together with manufacturing have been cited as some of the sectors that would be severely hit by the reduced and expensive credit.