Top five banks charge highest interest rate on loans

• The same institutions also have lower deposit rates, leading to them having the largest spreads relative to medium and small banks.
• The big five benefit from their market power based on the fact that they hold the largest amounts of deposits — which constitute 75 per cent of sources of funds for lending in commercial banks.
• Shareholder expectation was also seen as among the reasons for the spread, as the management was constantly under pressure to raise earnings per share and consequently dividends.
• According to CBK deposit and net assets data for 2011, the top five banks are KCB Group, Equity, Barclays, Co-op Bank, and StanChart.
• At a banking conference at the Hilton Hotel in Nairobi Tuesday, participants suggested that the big banks have managed to collect more deposits because they have a better reputation — which in turn has enabled them to lend more.

The top five banks are the most expensive lenders, according to a new study commissioned by the Kenya Bankers Association (KBA).

The same institutions also have lower deposit rates, leading to them having the largest spreads relative to medium and small banks.

The big five benefit from their market power based on the fact that they hold the largest amounts of deposits — which constitute 75 per cent of sources of funds for lending in commercial banks.

According to CBK deposit and net assets data for 2011, the top five banks are KCB Group, Equity, Barclays, Co-op Bank, and StanChart.

Shareholder expectation was also seen as among the reasons for the spread, as the management was constantly under pressure to raise earnings per share and consequently dividends.

All the top five banks are listed at the Nairobi Securities Exchange (NSE), whose performance is under constant watch from investors.

“You would expect the big banks to be more efficient and therefore have lower spreads, but in reality they have bigger spreads,” said Ms Maureen Were, an economist working at the Kenya School of Monetary Studies (KSMS).

Speaking at a banking conference at the Hilton Hotel in Nairobi Tuesday, Dr Were said that literature on bank interest rates showed that high spreads were a reflection of the sector’s inefficiency and level of development.

She was presenting a paper titled Determinants of Interest Rates Spread, co-authored with Joseph Wambua, at the conference called by KBA to review various preliminary studies relating to the industry.

Participants at the conference suggested that the big banks have managed to collect more deposits because they have a better reputation — which in turn has enabled them to lend more.

“Probably spreads are not a reflection of efficiency. But they have to do with the fact that people have more trust in these banks and so they take in more deposits,” said Radha Upadhyaya of the University of London’s School of Oriental and African Studies.

She said that there was a perception that high interest rates and the high spreads in the 1990s were a result of high nonperforming loans (NPLs), but it has since emerged that the spreads remain high despite the fall in NPLs.

Dr Were noted that over 50 per cent of all loans and advances were given by large banks, while medium-sized ones gave out about 40 per cent with small banks giving out less than 10 per cent.

KBA head of research Jacob Oduor said that the spread might also be a reflection of demand and supply of funds in the market.

Higher spread