The Central Bank of Kenya (CBK) has lifted the freeze on loan costs cap, spelling the beginning of expensive loans.
As a result, the regulator will now be approving applications by lenders who want to change their rates from the current ones.
Already, Equity Bank has been given the nod to trade their loans at interest rates between 13 percent and 18.5 percent compared to the current average of 13.5 percent.
“Interest on loans will now be based on the risk of the client. We are using sovereign risk as the base, then adding the risk of the individual sector and then within the sector the specific client risk and then we add operational costs,” said Equity Bank CEO Dr James Mwangi.
“So instead of the previous [pricing model] where we had loan appraisal fees, and all the rest, we are now saying here is one rate of interest and it is annualised and on reducing balances. We have simplified and removed the fees and combined the rate into one based on the sovereign risk.”
Equity will charge unsecured loans 18 percent interest while small businesses will be charged between 14 percent to 16 percent.
“There are corporates like the blue chip firms which will be able to get as low as the sovereign rates. those with higher risk will go all the way to 16 percent, then there is the SMEs from 14 percent to 16 percent. The unsecured individual lending micro, small and medium enterprises from 16 percent to 18 percent,” Mr Mwangi added.
CBK scrapped interest rate controls on November 7, 2019, but has refused to approve applications by lenders to increase their loan costs.
As a result, several lenders protested against CBK last year to the International Monetary Fund (IMF).
The lending rates averaged 12.12 percent in January 2022.