Equity Bank's announcement of an increase in loan prices has stirred attention in the Kenyan banking industry.
As the first lender to adjust its rates in response to the Central Bank of Kenya's new benchmark rate, Equity Bank has set a precedent that may prompt other financial institutions to follow suit.
With the Central Bank's recent adjustment of the central bank rate (CBR) from 9.5 percent to 10.5 percent, Equity Bank has taken the initiative to revise its lending rate accordingly.
Customers have been notified that their loan interest rates will now be tied to the revised Equity Bank Reference Rate (EBRR) of 14.69 percent, along with a margin determined by their credit risk profile.
This move signifies a shift towards risk-based pricing in the Kenyan banking sector, wherein customers are charged varying interest rates based on their assessed likelihood of loan repayment.
While this approach encourages banks to lend more by offsetting potential defaults, it also means that borrowers may face increased costs as interest rates rise.
Equity Bank's decision will impact both existing and new loans denominated in Kenyan shillings, affecting a significant portion of its loan book, valued at Sh448.9 billion as of March.
Tough times ahead for loan borrowers
As the bank takes this step, it is likely that other financial institutions will soon follow suit, necessitating higher monthly interest payments for borrowers across the industry.
This rate adjustment comes at a time when non-performing loans (NPLs) are a growing concern, as evidenced by the substantial increase in loan defaults totaling Sh82.9 billion within just four months.
The non-performing loans ratio has reached a 16-year high, standing at 14.9 percent in May, indicating a challenging economic landscape for borrowers.
As the cost of credit rises, borrowers will need to carefully manage their finances to meet their loan obligations.
The impact of these changes on borrowers' ability to repay and the overall health of the banking sector remains to be seen.
The coming months will shed light on how customers and financial institutions adapt to the new rate environment, potentially shaping the future of lending in Kenya.