Saccos cut interest rates to retain edge over Kenyan banks

Savings and Credit Co-operatives (Saccos) are reducing loan rates to retain their competitive edge after banks were forced to cut price of lending in line with the new interest capping law.

Their pricing, which has long kept interest rates at an average 12 per cent per annum (far below bank rates) has been their biggest selling point, earning them steady business.

But with the capping of bank interest rates, now at 14 per cent, saccos that had priced their loans at as high as 24 per cent are reviewing their price downwards.

Coast-based Bandari Sacco said it had reduced its rates to price its loans below the rate cap, but did not disclose previous rates.

“With effect from 1st November, 2016, all new loans will attract reduced rates. Back office (Bosa) loans are set at 12 per cent per annum, emergency loans 10 per cent per annum, school fees loans (8 per annum), Front Office (Fosa) loans (12 per cent per annum), Fixed deposits 10 per cent per annum,” said the sacco.

Mwalimu Sacco, touted as the largest in the country with 60,000 members has also announced cuts.

“We are pleased to update all our customers that we have revised our interest rates on our Bosa, Fosa and Business loans. These new rates come into effect on 1st October, 2016 and will apply to both existing and new loans,” it said in a notice.

Mwalimu, however, remains above the 14 per cent rate cap, with its Fosa’s 24-month advance loan product coming down from 24 per cent to 18 per cent.

It has lowered its Fosa 12-month advance from 18 per cent to 15 per cent and its business loan for individuals from 17 per cent to 15 per cent.

Nakuru County-based Cosmopolitan Sacco that primarily caters for savings and credit needs of teachers in the county has also reviewed its rates.

“Enjoy reduced rates on Fosa advance at 13 per cent per annum effective immediately,” said Cosmopolitan in a notice. The advance earlier attracted an interest of 15 per cent per annum.

READ: Tough times for banks as Uhuru caps cost of loans

Other saccos have, however, adopted a wait-and-see approach fearing that adjusting the loan cost mid-year cold negatively impact on their budgets.

“Even before the interest rate caps, Nation Sacco had the most competitive products with effective lending rates below seven per cent. However, we are assessing the market and a decision will be communicated to members in due course. For business reasons we see January as the most likely date for a review, if necessary,” said chairman Peter Munaita.

Mr Munaita said their products are nominally priced at between 12 per cent and 15 per cent per year but because they are on a reducing balance basis, the effective interest rate is between 6.7 per cent and 8.2 per cent.

Effective interest refers to the total interest income earned on a facility in a year.

The news of the rate cut is seen as good news for borrowers. But this will equally result in a significant shrinking of margins, with members taking home lower dividends (returns on shares) and rebates (interest on savings).

Kenya has over 5,000 registered saccos that have mobilised savings to the tune of Sh501 billion and built an asset base of Sh694 billion.

An estimated 230 saccos offer Fosas through over 550 outlets, enabling them to compete effectively with banks for retail banking business and lend non-members.

Experts say the fact that saccos have built thriving business by lending at such affordable rates for decades without any regulatory price caps is a pointer to the potential for financial innovation that does not focus on high rates.

Saccos are seen as affordable as they are member-focused and largely dedicate all the resources towards their borrowing needs.