Huge bank profits spark fresh effort to curb cost of loans in Kenya

Kenyan banks rode the high interest rates wave to grow their incomes by wide margins - renewing the parliamentarians’ quest to curb the cost of borrowing through legislation.

Also read: Banks’ queries on loan defaulters hit 1.8m

In the past couple of weeks that companies have been releasing their half-year results, many Kenyans have watched with consternation as banks announced double-digit growth in earnings for the period when their customers felt the greatest pain of borrowing and severe economic hardship.

The first six months of 2012 have been characterised by high level interest rates averaging 24 per cent and a headline inflation rate of about 16 per cent, deeply eroding the purchasing power of many households.

These realities were partly behind the MPs’ aggressive attempt early this year to legislate on interest rates – a move that stalled the passing by Parliament of the crucial Finance Bill for months.

The MPs, led by joint government Chief Whip Jakoyo Midiwo, accuse banks of excessive greed, arguing that the high interest rates are a big burden to ordinary citizens and are destroying many livelihoods across the country.

But the banks have responded with a range of answers, including the very complex one of risk assessment and computation into the cost of lending, besides warning that legislating on the cost of loans would confine borrowing to the small clique of individuals with assets to secure their debt.

As the banks announced their half- year results in the past two weeks, the one number that many ordinary Kenyans looked for was their interest income – the money earned from lending activities in the period under review.

The banks did not disappoint.

The numbers show that in the first six months of the year, the lenders grew their profit before tax by 30.9 per cent to Sh53.2 billion compared to Sh40.8 billion in a similar period last year.

Even more critical to the interest rates debate is the fact that for most banks, interest income was a key driver of profits growth – a clear demonstration that the lenders benefited immensely from the large margins arising from high interest rates.

Central Bank of Kenya (CBK) data shows that six banks, categorised as large banks, were the major beneficiaries of the high interest rate regime.
The six – Equity Bank, KCB, Barclays,Standard Chartered, Co-operative and CFC Stanbic – enjoyed net interest margins of over 15 per cent in the first six months of the year.

Net revenues for the big six were four percentage points higher than the total for the remaining 37 lenders.

“The higher interest rate environment has boosted margins for both KCB and Equity, given the low cost of funding,” said Renaissance Capital in a research note on the two banks. “Savings deposits account for more than 70 per cent of total deposits for both banks.”

In ordinary language, the researchers are saying that the banks took deposits at almost no cost but high interest on borrowers of the same funds raking in billions of shillings in interest income.