Commercial banks in Kenya are cutting back lending to the real estate sector amid fears that developers may default on their loans due to high interest rates.
According to industry sources, banks began reducing credit to the sector as early as July after the Central Bank of Kenya (CBK) raised its base rate in a bid to stabilise the shilling.
CBK in July adjusted its key lending rate by 150 percentage points to 11.5 per cent, up from 10 per cent as a way of supporting the local currency against weakening further to the dollar.
The move has seen banks charging interest rates as high as 30 per cent, thereby discouraging borrowers from taking mortgages or borrowing to purchase property.
“Banks are shying away from lending to real estate firms in effort to reduce their exposure to rising defaults especially in high end residential market,” a banker told KHG on condition of anonymity.
The Royal Institution of Chattered Surveyors and the Institution of Surveyors of Kenya recently warned that the rising cost of credit will impact the borrowing capacity of most developers, denting the heavily loans-driven sector.
A high interest regime will also affect home buyers and investors serving mortgages in the country while reducing the number of construction projects in the country.
It will also increase property prices as developers brave enough to borrow at the prevailing interest rates will hike their prices to protect their margins.