WHY LOW BANK RATES ARE GOOD FOR YOUR FAMILY

President Uhuru Kenyatta signing into law the 2015 Banking (Amendment) Bill at State House on August 24, 2016. PHOTO | PSCU 

By EDWIN OKOTH

Families are among thousands of borrowers who can now smile back to the bank after President Uhuru Kenyatta finally signed into law the proposal to cap interest rates.

A family currently struggling with Sh154,331 a month on a Sh10 million mortgage stretching 20 years in the current market rate will now pay Sh127,999, creating a huge relief.

The money saved every month amounts to an extra Sh 316,000 in a year, an amount able to take care of other needs like food and clothing.

The burdened borrowers, whose monthly loan instalments had added to the pain of  increased cost of living will now find relief with the rates set to drop by close to 10 per cent.

The new rate of 14.5 per cent since the current rate given the Central Bank Rate is at 10.5 per cent means a borrower who has been repaying a personal loan of Sh1 million at the current market rate may get up to Sh6,000 more on their monthly earnings.

Banks have been charging up to 24 per cent for salary loans with maximum period of 60 months bringing the instalments to Sh28,767.

Banks have also been blamed for failing to reduce interest rates to promote small and medium enterprises who have been locked out by the high rates.

A short term business loan of Sh100,000 repayable in one year attracted a monthly repayment of between Sh9,000 and Sh10,400.

The current rate will now be between Sh8,600 and Sh9,002.

With extra income, the borrowers will now access more financing since their repayment abilities will have changed.

The law prohibits the banks from charging a rate of interest that is higher than four per cent of Central Bank Rate.

The rate, which may be amended every two months, might see fluctuations in interest rates charged by banks and it remains to be see how banks will change the repayment schedules.

The bankers who have been opposed to the bill will be the most disappointed lot after failing to lobby in their favour. Loans make one of their most lucrative sources of profit.

Motor vehicle dealers will welcome the move since high interest rates had weighed down their businesses.

Another  group that will be smiling will be the housing and property market dealers who have suffered from prohibitive mortgage rates discouraging customers.

Savings, Credit and Cooperative Societies may also have the last smile when banks choose to lock out lower end borrowers in the new interest rate regime for fear of lending at a low rate to risky borrowers.

Loans make the single most lucrative source of income for banks who made a combined profit of Sh145 billion last year even after their listed counterparts in the corporate world faced financial headwinds which saw most of them giving profit warnings as others declared losses in the same period.

SOURCE: NATION MEDIA