The New Year 2024 brings difficult choices for commercial banks, who have to decide whether to increase their lending rates to reflect the higher cost of funds, or to keep them relatively stable to avoid more loan defaults.
The Central Bank of Kenya (CBK) raised interest rates three times in 2023, with the most recent one on December 5, 2033.
This has implications for both borrowers and lenders, as the rate of loan defaults had reached a 16-year high by October this year.
Banks, who have increased their provisions for loan defaults, have to determine how much they can adjust their lending rates in line with the CBR without discouraging customers from repaying their loans.
Banks will also be watching the government paper rates, which could lure them to reduce lending to the private sector and invest in treasury bills and bonds instead.
The tricky trade-off may make some banks postpone the full adjustment of their loans according to the CBR, which went from 10.5 percent to 12.5 percent— the highest since September 5, 2012, when it was at 13 percent.