Banks’ salary expenses raise cost of borrowing

• The survey, which is the first of its kind by the industry, makes the case for adoption of technology to reduce overheads and consequently the lending rate and wide spread,
• However, though the research did not directly recommend it, it could by implication point to staff layoffs or a freeze on staff recruitment going forward if the industry is to reduce the spread significantly.
• The study showed the average lending rate was 15.05 last year against an average deposit rate of 4.22 per cent – leading to a spread of 10.83 per cent.
• The spread is composed of 6.73 per cent in overheads, 4.75 per cent in cost of deposits put at the Central Bank of Kenya as cash reserve ratio and 1.61 per cent in taxes and 1.85 per cent in net profit and 0.6 per cent in loan loss provisions. The research also recommended that banks diversify their earnings away from interest income in order for the spread to come down.

He added that Kenya was not an exception on the spread, noting that it was even bigger in Uganda.

Josephat Mboya, a lecturer at Strathmore University, said the research should include data on the various banking segments — large, medium and small. He said it was possible that aggregate data hid inefficiency in certain segments of the industry.

Other participants at the conference said there tended to be a lot of focus on the banking industry mainly because it published its results, but no one talked about the margins in, for example, the hospitality or construction industries.

girungu@ke.nationmedia.com