For business owners who are seeking financing, interest rates play a significant role in finding the best loan option since they can impact borrowing costs greatly. When the Central Bank raises rates, the monthly payments for things like small business loans can become proportionately more expensive. For a small business owner who has to account for their business finances over the next several years, a seemingly small change can have major impacts.
It is common for interest rates to fluctuate over time due to many different factors, including economic conditions and government monetary policies. While a certain amount of fluctuation is expected, extreme changes can cause some strain on business owners as their out-of-pocket costs begin to rise.
To help counter the impact of volatile interest rates, many lenders will offer rate structure options, allowing the borrower to choose between an adjustable rate or a variable rate. Adjustable-rate financing means the interest rate is locked in for a set period of time. A variable rate means the interest rate can change quickly, often monthly or quarterly.
Globally, the financial conditions have tightened as central banks continue to hike interest rates. Amid the highly uncertain global environment, risks to financial stability have increased substantially.
In Kenya, there has been a rapid increase in interest rates as banks have increased interest rates on customer loans, which means customers deemed riskiest pay more. The trigger was the rise in the central bank’s benchmark lending rate, which affected both new and existing credit facilities. Bank loans are also expected to attract high interest as most implement their risk-based pricing models. Borrowers from Saccos, however have not been affected as most Saccos have not increased their interest rates. The Sacco business model is about saving and credit and members get loans at affordable and stable rates.
