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Falling interest rates offer reprieve for big corporates
This year, CBK has cumulatively lowered the CBR by 1.75 percentage points to 11.25 percent on the back of cooling inflation and stabilised exchange rate.
In 2017 and 2018, Sanlam Kenya tapped two two-year loans worth $27 million (Sh3.5 billion) to, among other things, recapitalise the insurance businesses and finance completion of its office complex along Waiyaki Way.
The two facilities were from Sanlam Capital Markets Property Limited. When they were about to mature, Sanlam Kenya settled them using a Sh3 billion loan from Stanbic Bank Kenya, effectively refinancing the debt. The bank loan was now due in February 2021.
The interest on Stanbic’s loan was pegged to three-month average of 182-day Treasury Bill rate plus 4.5 percent margin for a term of three years.
The loan was restructured again in 2022 to Sh4 billion facility with the same bank for another two years to March 2025 with the margin rising to 4.95 percent.
Unknown to Sanlam, the Central Bank of Kenya (CBK) was just about to start increasing the Central Bank Rate (CBR) in the same 2022 as the shilling started weakening against the dollar and inflation rose.
Sanlam is among borrowers who have endured a difficult period that has seen base lending rates soar to a 22-year high of 13 percent this year, forcing borrowers to part with more money to service their loans.
Even though borrowers are crossing into 2025 with a respite after CBK lowered the base lending rate thrice— between August 6 and December 5—, Sanlam has called for a Sh3.25 billion rights issue to repay the loan before the March 2025 maturity and rescue itself from the debt burden.
“We have realised that our finance costs keep on increasing despite the payments being made. We would rather have the finance cost eliminated from our profit and loss account so that we can only maintain the financial cost for transactions but not of the loan,” said Patrick Tumbo, chief executive of Sanlam Kenya.
Banks are dragging their feet on giving customers interest rates that are commensurate with cuts in CBR, saying that there is an elevated risk of loan defaults and that they had locked in deposits at a higher rate.
However, borrowers are generally looking at reduced interest rates as CBK joins major economies such as the USA and UK, signaling that the peak of interest rates may be behind them as 2025 starts.
The US Federal Reserve, just like CBK, has cut rates thrice this year and projects at least two more for 2025. After two years of increasing the CBR —from seven percent in March 2022 to the 22-year high of 13 percent that lasted between February 6 and August 5 this year—, CBK left it until late in the year to start serving some relief to borrowers.
This year, CBK has cumulatively lowered the CBR by 1.75 percentage points to 11.25 percent on the back of cooling inflation and stabilised exchange rate.
Paul Russo, chief executive at KCB Group, says while the cuts in CBR are a welcome move to stimulate economic activity in the country, customers have to wait for up to six months to start feeling the relief.
“Banks face a lag in implementing the rate cuts due to locked-in, higher-cost deposits. As these deposits mature and are replaced with lower-cost options, banks will have greater flexibility to reduce lending rates further.
It takes about three-six months to reflect the adjustments. Effectively, therefore, the impact of the lower CBR in 2024 will be felt by the first quarter of 2025,” said Mr Russo.
The CBR of 13 percent, a rate which CBK served in order to tackle inflation and stabilise the shilling against the dollar, had seen many lenders price loans above 25 percent in what was particularly painful for those who had tapped loans on the strength of their payslips.
This is because in the past two years, the State has raided payslips with new or increased deductions to fund healthcare, pension and affordable housing, cutting the take-home pay for workers. Kenya Bankers Association (KBA) acknowledges the hardships that borrowers have found themselves in.
“We acknowledge that many borrowers continue to face financial strains driven by increased cost of living and of doing business; the protracted challenge of delayed payments to businesses; and generally low business activity due to reduced consumer demand arising from reduced disposable incomes. These challenges elevate consumer risks and constraints lending at lower rates,” said KBA.
Effective October this year, the government started deducting workers 2.75 percent of gross pay to fund the social healthcare programme.
The deductions towards social healthcare insurance came months after the government in February this year doubled contribution towards the National Social Security Fund to Sh2,160. Last year, workers were hit with a 1.5 percent housing levy on gross pay.
The new deductions have seen many employers breach the Employment Act 2007 that stipulates that deductions from an employee's pay —whether statutory or voluntary— should not exceed two-thirds of their total salary.
The State’s onslaught on payslips has also come at a time spotlight has been shone on the inadequacy of earnings in an economy where pay rises have been below inflation for four straight years.
