This archive report was first published on 6 September 2021.
Kenya's loan interest charges have reached a 16-month high, according to the Central Bank of Kenya (CBK). The lending rate hit 12.09 percent in July, the highest since March 2020 when the country reported its first case of Coronavirus infection.
The rise in loan costs comes at a time when the government implemented a 20 percent excise duty on fees and commissions earned from loans and advances to customers from July 1. This will lead to an increase in the total cost of credit as the tax is directly passed to the borrower.
Players in the sector attribute the rise in the cost of loans to an increasing demand for credit among households and businesses with improving economic activities. Kenya Bankers Association (KBA) chief executive Habil Olaka has said the rise is marginal and would not have a huge hit on borrowers.
“The rise is marginal and consumers would barely feel it. The lending rate is purely the interest banks charge on loans, other charges are not included in the lending rate,” said Dr Olaka.
However, the increase signals a higher cost of credit to households and businesses in the coming months as the economy recovers. Data shows growth in private sector credit increased to 7.7 percent in June 2021, from 6.8 percent in April due to a higher number of loan applications from sectors such as manufacturing, transport and communications, and consumer durables.
Previously, those fees and commissions were exempted from excise duty but started attracting 20 percent for each category after the signing of Finance Bill 20201. “Excise duty is not a charge on the business, it is charged on the consumer so ultimately banks will be forced to pass them on to borrowers,” Dr Olaka added.
