Why it’s prudent to shelve that loan application from your bank


Three months ago, Benjamin Kiptanui took a Sh500,000 agricultural loan at a cost of 19 per cent. He was confident that he would easily afford the Sh24,792 monthly repayment.

“I earn between Sh35,000 and Sh40,000 from my teaching job and one dairy cow. I was confident that the Sh500,000 loan would enable me to buy a new Friesian dairy breed and construct a proper zero grazing shed for my cows,” says the primary school teacher at Kaptaret.

Although he has already constructed a new shed and ordered for a Sh250,000 dairy cow, Mr Kiptanui is afraid that he may no longer be able pay the monthly instalment.


“Last week, I received a notification from my bank that they were raising the cost of my loan from 19 per cent to 26.5 per cent,” he says. “I haven’t slept properly since then. I’ve approached my credit officer thrice to try and negotiate a lower price, but she has maintained that the bank has no other alternative than to charge me higher.”

Effectively, the rise in Mr Kiptanui’s loan will see his cumulative cost go up from Sh95,000 to Sh132,500. “I will now pay Sh37,500 more,” he says.

Borrowers across the country are suffering a similar fate to that of Mr Kiptanui.

Those whose interest rates have been raised to the current high of 27 per cent to 30 per cent could end up paying a total of at least Sh635,000 for a Sh500,000 loan.

They would have Sh595,000 at 19 per cent.

Worse, those who have been hit with a 30 per cent interest rate for a four-year loan of Sh1 million will have to cough up Sh300,000 more.


Banks say they have been left with no option but to push up the cost of loans with Kenya Bankers Association CEO Habil Olaka stating that lenders are responding to the trend in the economy.

Last week Victoria Commercial Bank increased its lending rates by 6 per cent with effect from November 12, citing the high T-Bill rates.

The National Treasury has been offering investors 23 per cent returns on Treasury Bills from 10.6 per cent in January and 13.9 per cent in September this year.

In the first week of October, for instance, the government paid 21.35 per cent for the 91-day Treasury Bill before accelerating it to 22.9 per cent.

Conversely the interest rates have been climbing up. By: the end of July, the average lending rate stood at 15.75 per cent.

This represented an increase of 0.49 from May when the average rates were at 15.26 per cent.

In the same vein, the overdraft rate went up to a high of 16.05 per cent in July.

Between September and October, interest rates shot up from 19 per cent to as high as 27 per cent.

The rise has seemingly turned the Kenya Banks Reference Rate (KBRR) ineffective, with the Central Bank of Kenya constantly raising its base lending rate.


In April this year, the Central Bank Rate (CBR) stood at 8.5 per cent. Between June and October, the Central Bank of Kenya revised its base lending rate by three points to 11.50 per cent.

Effectively, this prompted the rise of the KBRR from 8.54 per cent to 9.87 per cent from April to July.

Mr James Njenga, a personal finance expert, says the adjustments by CBK were aimed at taming the free-falling local currency.

This was after the shilling hit a low of 105.2 units against the US dollar towards the end of September.

This represented an alarming depreciation of more than Sh10 from the 90.78 units against the dollar at the start of the year.

The rise in the cost of loans, though, is not only affecting the traditional bank credit.

Last week, KCB announced that it was increasing its lending rates on its KCB M-Pesa lending platform.

According to a text message notification statement by the bank to its customers, new KCB M-Pesa loans taken from October 26 will be attracting a six per cent monthly interest rate, a five per cent interest rate for three months and a four per cent interest rate for six months.

When the rise in interest rates kicked in, borrowers at Barclays Bank were the first to be affected.

The lender increased its interest rate from 16.19 per cent in July to 23.5 per cent in October.

Standard Chartered Bank customers have also received notifications that their loan repayments will be going up from November.

“Due to the prevailing challenging economic conditions and subsequent tightening of the monetary policy by the Central Bank of Kenya (CBK), it has become necessary for Standard Chartered Bank to review its current pricing mechanism on our Kenya shilling credit facilities.

As a result, effective November 19, 2015 the margin applicable on your credit facility will be increased,” said Standard Chartered in a notice to its customers.

Further, speaking to Money, Mr John Kasuvu, the financial controller at Habib Bank, revealed that the lender has raised its interest rates.

However, Mr Kasuvu did not give the percentage by which the cost of loan had gone up.


The rise in the cost of loans has already led to a higher default rate.

Between January and May, for instance, non-performing loans increased by 16 per cent from Sh104 billion. By: June 2015, bad loans had further increased to Sh124.6 billion.

However, according to a market report by Cytonn Investments, though the current rising interest rates could result in higher NPLs, the impact may be minimal as banks is likely to extend the payment period of the loans rather than increase monthly payments.

This is meant to help borrowers maintain the integrity of their loans books.

The report by Cytonn further added that any financial investors should be biased towards short-term fixed income instruments due to the uncertainty in the interest rate environment.

“The Government’s borrowing programme for the current fiscal year, targeted at Sh219 billion, has been stepped up, having borrowed Sh52 billion for the current fiscal year,” the report noted.

“We expect the aggressive borrowing to continue, as pressure remains to re-finance their obligations.”