Costly Loans as CBK Raises Base Lending Rate - Money Weekly

The last day of March is here marking an end to the first quarter of 2023. As Kenyans struggle to keep up with the rising cost of living, there is a corresponding increase in the base lending rate by the Central Bank of Kenya (CBK).

From borrowers struggling with loan repayments, Sacco loans are gaining more traction among Kenyans compared to banks, the rise in the cost of electricity and Google taking down some loan apps from Play store. We have a lot to unpack this week.

As we do every week, here's our summary of the top money news from the last seven days and what they mean for your pocket.

Costly Loans as CBK Raises Base Lending Rate

The Central Bank of Kenya (CBK) has raised the benchmark lending rate from 8.75% to 9.5% to contain the economy's soaring inflation.

For Kenyan borrowers already dealing with high living costs, the 75 basis point increase means a higher cost of borrowing.

Kenya's overall inflation rate increased from 9.0% in February 2023 to 9.2%, owing mostly to higher food prices.

According to CBK, food prices rose 13.3% in February, up from 12.8% in January, attributed primarily to increases in vegetable costs caused by the hot and dry weather that prevailed at the time.

“The MPC noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy, and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations,” said CBK Governor Patrick Njoroge.

Furthermore, fuel inflation remained high in February, at 13.8%, owing primarily to the elimination of fuel subsidies and increases in electricity prices due to higher rates.

Kenya's inflation has been above the 2.5% - 7.5% target range since June, prompting the Monetary Policy Committee (MPC) to raise benchmark interest rates to curb consumer spending.

Despite a comparable hike in the benchmark lending rate in September, inflation has exceeded the government's target range of 2.5% - 7.5% since June last year.

Inflation rose from 7.1% in May to 7.1% in June, due to increasing fuel and food prices caused by the worst drought in 40 years and Russia's conflict in Ukraine.

The CBK rate has increased thrice in the last six months.

High Cost of Living Makes Borrowers Struggle with Loan Repayments

Kenyan borrowers are struggling to meet their debt obligations due to inadequate resources and growing living costs.

According to CBK’s most recent data, the rate of nonperforming loans (NPLs) climbed to 14% in February 2023 from 13.3% in December 2022.

In addition to increasing living costs, the ongoing global financial crisis, which has caused the local currency to devalue, is also responsible for the banking industry's high NPL ratio. 

The shilling has dropped 5.8% since January 2023 and 14% year on year against the dollar. Yesterday, March 30 2023, the shilling fell to a new low of Ksh132.18.

CBK Governor Patrick Njoroge voiced confidence yesterday that a series of measures, including a plan for government-to-government oil imports, will cause the foreign exchange market to stabilise over the next six months.  

Sacco Loans More Preferable Among Kenyans 

Because of the ease with which members can receive credit facilities, saccos and microfinance banks have grown in popularity among loan applicants.

According to the regulator’s data, as of January 2023, Saccos and microfinance banks made a total of Ksh600.7 billion in loans to private households out of a total of Ksh1.12 trillion in loans made to the industry.

This equates to 53.8% of net credit distributed to individuals and households with the majority borrowing against their payslips with banks disbursing Sh515 billion.

For the fiscal year ending December 31, 2023, 176 saccos have been granted a deposit-taking license, and another 183 have been granted a license for non-deposit operations, which means they can only take deposits in the form of share capital from members.

Savings totaled Ksh431.46 billion among the 5.47 million deposit-taking sacco members in 2020.

There were 14 microfinance banks in December 2021, with credit books totaling Ksh9.08 billion and deposits totaling Ksh50.4 billion.

The amount of loans made by saccos and microfinance banks has grown year after year, from the period that ended in January 2022 to the one that ended in January 2023.

Ksh67.3 billion  more loans were made, compared to Ksh37.3 billion, made by banks in the same period.

Kenyans to Pay More for Electricity as Tarrif Increase Approved

Following the approval of Kenya Power's higher tariffs by the energy sector regulator, electricity prices will go up by up to 63% beginning tomorrow, April 1, 2023. This is in an attempt by the utility firm to collect additional funds in order to upgrade its aging distribution systems.

For the new tariffs, the Energy and Petroleum Regulatory Authority (EPRA) classified customers into three categories.

Households consuming below 30 units a month will have a 3.6% reduction in costs, from Ksh21.99 to Ksh21.16 per unit.

Customers who use between 31 and 100 units will now pay Ksh26.10 per unit, up from Ksh21.99 per unit. 

The price for the third cluster of customers who use more than 100 units, was increased from Ksh27.92 to Ksh31.75 per unit. 

Kenya Power will generate Ksh177 billion in revenue in the current fiscal year 2022/2023 thanks to the recently authorized tariffs.

Google Removes Some Kenyan Loan Apps From Playstore

Google has removed hundreds of loan apps from the Kenyan Play Store since its new policy went into effect in January 2023, requiring digital lenders in East African to provide proof of license.

The directive followed Kenya's Digital Credit Providers (DCP) rules from the previous year, which required businesses that offer loans online to acquire a license from the CBK. 

Additionally, the tech giant stated that it would only take declarations and licenses from firms listed in the DCP directory on the official CBK website.

In a statement on January 30, 2023, the CBK stated that it had received 381 applications for licensing from digital lenders since March 2022.

Only 32 lenders have so far received licenses. The regulator indicated that other applications were in various stages of verification on compliance with regulations and standards, a process that involves other agencies - including the Data Protection Commissioner.

Read Also: Beware of Copycat Digital Loan Apps in Kenya