Customers of Equity Bank in Kenya will effectively from Monday start paying more to service their loans.
With the new changes, Equity Bank has become the first lender to announce an increase in loan prices and on Thursday notified customers that it will adjust its lending rate to 14.69%, up from 12.5% in January.
The rise in lending rates is inline with the new benchmark rate announced by the Central Bank of Kenya (CBK).
According to details, loans will now be priced at 14.69% plus a margin determined based on each customer’s risk profile, meaning some will see their total interest rate rise above the maximum of 21% that Equity announced in January.
The changes come after CBK on June 26 raised the central bank rate (CBR) from 9.5% to 10.5%— the highest point in nearly seven years.
“Following the adjustment of CBR on 26th June 2023 from 9.5% to 10.5%, we wish to inform our customers that we shall adjust loan interest rates to reflect a revised Equity Bank Reference Rate (EBRR) of 14.69% plus a margin based on the customer’s credit risk with effect from 10th July 2023,” said the lender in a notice.
The changes will apply to all existing and new Kenya shilling-denominated loans, according to the lender whose loan book in the Kenyan market stood at Sh448.9 billion at the end of March.
Equity Bank Kenya’s yield on loans—the annual net profit that it earns on lending—stood at 10.9% in the quarter that ended March 2023 compared with 10.9% in a similar period last year. This was even as the cost of funds fell from four percent to 2.9%.
Other banks are expected to follow Equity in revising upwards the cost of loans, in a move that will require customers to increase their monthly interest payments.
Banks have been shifting to risk-based pricing regime where different consumers are charged different interest rates based on the estimated risk that the consumers will fail to pay back their loans.
Widespread adoption of risk-based lending has been rising the cost of credit for most borrowers but it has helped incentivise banks to lend more as the increased returns cover the risk of default by some customers.
