Small banks reduced their lending rates in the first three months of the year as the large banks defied public outcry to increase their loan charges, a survey by the banking sector regulator has showed.
The Central Bank of Kenya (CBK) survey of all the 43 lenders showed small banks had reduced their lending rates to 19 per cent in March from an average 19.6 per cent in January, while large banks charged 21.1 per cent up from 19.7 over the same period.
The increase in lending rates by large banks saw the gap between their cost of raising cash and their lending rate widen to 16.1 per cent, compared to small banks’ 11 per cent and medium sized banks’ 12.1 per cent.
“Small banks have been reducing their spread for the last three months through lower lending rates. Medium and small banks maintained competitive deposit rates, they had lower spreads,” said CBK in the survey done in April.
Commercial banks stated that the key determinants of their interest spread are cost of funds, credit risk, the treasury bill rate and Central Bank Rate (CBR).
The Central Bank has maintained its policy rate (CBR) at 18 per cent in the past five months in an effort to dampen credit appetite and reduce inflation believed to be driven by too much cash chasing too few goods.
Kenya has six large banks as per CBK’s classification, which include KCB, Equity, Barclays, Standard Chartered, Co-operative and CFC Stanbic.
The classification identifies 22 small banks and 15 medium sized lenders, depending on their market share and balance sheet size.
Banks have been under pressure to cut their lending rates, with a bill to introduce a cap on interest rates defeated in parliament following government marshalling against it. The government, however, insisted that the banks needed to cut their rates.
The survey notes that average base lending rates are declining, but are yet to be reflected in the average commercial banks’ lending rates-— apart from those of small banks.
The reduction in lending rates by small banks goes against market expectations, as they incur higher cost of funds unlike their big brothers who—due to their wide branch network-— are able source deposits at cheaper rates.
Analysts said the differences were based on the composition of the lenders’ loan book, with large banks having to factor higher credit risk as opposed to the small banks, whose loans are usually security backed.
“If you are lending unsecured loans, then you have more flexibility to increase your rates unlike the secured loans. Also the size of the foreign currency denominated loans is a factor as they enjoy a lower interest rate,” said Mr Francis Mwangi, an analyst with the Standard Investment Bank.
Small and medium sized banks such as ABC, Consolidated, and NIC Bank have in the recent past turned to international lenders to finance foreign currency denominated loans.
“The loan (Sh1.8 billion) we got from Proparco is for financing hard currency facilities. Given there is a big disparity between the shilling rate and the dollar rate more businesses are turning to dollar loans,” said Mr James Macharia, the MD of medium sized lender, NIC Bank, in an interview with Business Daily.
The survey showed that the cost of fund had generally decreased across market segments and bank categories since January 2012 due to improved liquidity in the market.