Next time the loans officer at
your bank declines to give you a loan, here could be the reason. In Kenya,
credit and lending are influenced by a number of factors. Understanding these
factors is crucial for you as a borrower to walk the financial space in the
country effectively. This article thus delves into the five factors: interest
rates, credit score, economic condition, fiscal regulations, and market
competition that shape lending in Kenya.
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| 200 shillings Kenyan Bank Note |
1. Interest Rates
Interest rates are fundamental
to Kenya's and other countries' credit and lending processes. The interest rate
is the one that determines the cost of borrowing and the return on lending for
the lender, making it significant for the decisions of both lenders and
borrowers.
Kenyan Monetary Policy:
The
Central Bank of Kenya (CBK) is mandated by the constitution to set the
benchmark interest rates through its monetary policy. Central Bank Rate (CBR) changes influence commercial banks' interest rates. The
current CBK rate is 13%.
Inflation Rates:
Many of you may not understand that inflation
also affects interest rates. Inflation refers to the gradual loss of
purchasing power, reflected in the rise in prices for goods and services over
time. The inflation rate is calculated as the average price increase of a
basket of selected goods and services over one year. High inflation leads
to higher interest rates as lenders seek to compensate for the decreased
purchasing power of money.
Risk Premium:
This is
an additional interest rate charged by lenders to compensate for the risk of
default. It reflects the uncertainty of your ability to repay the loan.
Lenders assess your
creditworthiness and adjust the interest rate accordingly. The risk premium
will be higher if you’re considered to have a higher risk due to a low credit
score, unstable income, or other factors.
2.
Credit Scores
Credit scores are becoming
critical in Kenya's lending process as they measure your creditworthiness.
Credit Information Sharing:
Credit
information is shared among financial institutions through Credit Reference
Bureaus (CRBs) in Kenya. This sharing allows lenders to access the credit
history of potential borrowers, aiding in risk assessment. You can check your CRB status by emailing creditbureau@metropol.co.ke or SSD *433#
using your Safaricom line, then follow the instructions. Your CRB Status
can be on the Green, Black, or Gold, depending on the Metro-Score, which
measures your creditworthiness and the likelihood of meeting your financial
obligations. The score is calculated using mathematical models developed from
behavior patterns of credit data provided to the bureau.
Credit History:
Your credit history, including past loan repayments and any defaults,
significantly impacts your credit score. A good credit score can lead to
better loan terms, while a poor score can lead to total denial or higher
interest rates.
Credit Utilization:
How
much of the available credit you use also affects your credit score.
High credit utilization can indicate financial distress, negatively impacting
the credit score.
3.
Kenyan Economic Conditions
The overall economic
conditions in the country have a direct impact on credit and lending
activities. The economy is recovering from the COVID-19 slag and the
electioneering period, so it is a good time to utilize a good credit score.
Economic Growth:
In periods of economic growth, lending tends to increase. Why? Because businesses
and individuals are more optimistic about the future. They’re willing to invest
in expansion, purchase assets, or start new ventures. As a result, they seek
loans to finance these endeavors.
When the economy is booming,
companies see profit opportunities, and consumers feel secure in their jobs.
This confidence encourages borrowing. Financial institutions are also more
willing to lend because they anticipate a high likelihood of repayment.
Conversely, lending activities
decrease during economic distress like a recession or financial crisis. Why?
Because uncertainty prevails. Businesses become cautious, consumers tighten
their belts, and everyone worries about job security.
In tough times, businesses
will postpone expansion plans, leading to reduced borrowing. Due to economic
uncertainty, individuals will delay major purchases (like homes or cars).
Lenders, too, become risk-averse as they fear defaults.
Employment Rates:
High
employment rates boost confidence in borrowers’ ability to repay loans, leading
to increased lending. Conversely, high unemployment can lead to tighter lending
criteria.
A borrower with a stable job
is considered less risky. Employment provides the means to meet financial
obligations. Lenders assess your ability to repay based on your
employment/earning status.
Shilling Stability:
The
stability of the Kenyan shilling against the US Dollar and other leading global
currencies also affects lending. Major losses against these currencies can lead
to increased risk and uncertainty, causing lenders to be more cautious.
Currency fluctuations
introduce risk. If a borrower earns in Kenyan Shilling but the bank owes
a debt in a stronger foreign currency, repayment becomes uncertain. Lenders
worry about exchange rate risk.
4.
Kenyan Financial Regulatory Framework
Kenya’s regulatory framework
ensures a stable and fair lending environment.
CBK Regulations:
The
CBK regulates commercial banks and other financial institutions, setting rules
to ensure financial stability and protect consumers by providing legal and
regulatory frameworks and issuing prudential guidelines to govern the
operations of financial institutions under its mandate. It also licenses and
undertakes surveillance of financial institutions to ensure compliance with
laws and regulations. These regulations include caps on interest rates and
requirements for minimum capital reserves.
Kenyan Consumer Protection Laws:
These
laws protect borrowers from unfair lending practices. They ensure transparency
in the lending process, including clear communication of loan terms and
conditions.
CBK Digital Lending Regulations:
With
the rise of digital lending platforms in Kenya, the
Digital CreditProviders Regulations 2021 were introduced to ensure these platforms are
licensed and operate fairly and transparently, protecting consumers from
predatory lending practices.
5.
Kenyan Financial Industry Competition
Competition within the lending
market influences the terms and availability of credit.
Bank Competition:
Traditional
banks compete with each other to offer attractive loan products, leading to
better interest rates and terms for borrowers. The capping of the interest
rates by CBK ensures that the players in the sector compete fairly and that the
small banks are not driven out of business by the bigger corporations.
Digital Lenders:
The
emergence of digital lenders has increased competition in the market. These
platforms offer accessible loan products for individuals and small businesses
that might not meet traditional banks’ criteria. However, their interest rates
are higher than those of banks and SACCOs due to the high risks the lender
takes.
Microfinance Institutions:
These
institutions are crucial in providing credit to underserved populations. They
have been essential in driving formal banking to marginalized communities since
most are community-based. Their loans are the cheapest in the country. Thus,
their presence puts pressure on commercial banks by offering competitive rates
and having better reach in Kenyan communities.
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| 50 Shillings Kenyan Bank Note |
Understanding the factors that
guide credit and lending in Kenya is essential for making informed financial
decisions. Interest rates, credit scores, economic conditions, regulatory
frameworks, and market competition all play a part in accessing credit. Staying
informed about these factors will help you as a borrower improve your chances
of securing favorable loan terms, while lenders can better manage risk and
promote financial stability. As the Kenyan financial sector continues to
evolve, these factors will remain key to navigating the dynamic world of credit
and lending.
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