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Increase on Loan Interest Rates

A. Causes of the rising cost of loans by commercial banks

The Central Bank of Kenya Act grants the Central Bank of Kenya (CBK) numerous powers to determine the interest rates charged by commercial banks. Pursuant to the Banking Regulations, 2006, every commercial bank must seek the approval of the CBK before increasing the interest rates charged on loans.

The CBK usually sets a benchmark lending rate within which interest rates must be charged. Commercial banks are therefore under the obligation to abide by the CBK’s benchmark rate. Recently, the Central Bank of Kenya raised its benchmark lending rate from 7.50% to 8.25%, the highest margin in more than seven years. Therefore, this has paved way for commercial banks to raise their base interest rates which base interest rates usually vary from one bank to another. For instance, banks rely on issues such as the cost of funds and the risk associated to lending to a specific customer to determine the base interest rates.

B. Implication of the increase of interest rates

The access to affordable loans is essential for the growth and expansion of micro, small and medium sized enterprises (MSMEs). Increasing the cost of loans might derail the growth of MSMEs such that the MSMEs may be dissuaded from seeking unaffordable loans. MSMEs are likely to be charged high interest rates due to the risk associated with lending to such borrowers

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