Account transfers deny bank savers high rates

Interest-earning deposits in banks dropped by Sh176.23 billion between August and December last year, revealing the extent to which banks went converting customer savings accounts into current accounts to avoid paying depositors for the cash.

The move caused a 15 per cent drop in the value of banking sector savings and time deposits categorised as interest-earning to a three-year low of Sh1.02 trillion, according to a Standard Investment Bank (SIB) report compiled from Central Bank of Kenya (CBK) and Kenya National Bureau of Statistics (KNBS) data.

Kenya last September brought into force a new law that requires banks to pay depositors interest at 70 per cent of the prevailing Central Bank Rate — which currently stands at 10 per cent — meaning depositors are entitled to seven per cent interest per annum on their savings.

No such interest is payable on transaction or current accounts, making the conversion to current accounts critical.

No conversion allowed

SIB said contraction in the value of savings and time deposit accounts went against the central bank’s assertion that no conversion from interest-earning accounts to non-interest-earning would be allowed.

“In our view, the contraction further highlights the weakness of the current rates control law – deposit holders are not benefiting fully from the set deposits rate,” said Francis Mwangi, who heads research at SIB.

“Most commercial banks have reported either flat or reduced cost of funds or interest expenses revealing yet another benefit the banks have derived from this law,” SIB said.

Many analysts expected banks to minimise the number of interest-earning accounts on their portfolios in response to the rate capping law that also requires them to charge interest on loans at not more than four percentage points above the CBR.

The rate cap has also squeezed the wide margins commercial banks have enjoyed over the years, where spreads between deposit and lending rates stood above 10 percentage points.

“For the broader banking industry, we expect the drop in value of interest-earning deposits to shield net interest margins from the capping of lending rates,” said Mr Mwangi.

Largest lenders

Half of the 10 largest lenders (that control 72 per cent of deposits) saw their interest expenses on customer deposits fall last year compared to 2015, in spite of some recording an actual growth in volume of deposits.

KCB’s interest expenses fell to Sh14.5 billion from Sh15.3 billion in 2015, despite growing the deposits by Sh23.8 billion to Sh448.2 billion.

I&M Bank reported a 3.9 per cent fall in interest paid on deposits to Sh7.7 billion even as the volume of deposits rose by 10.2 per cent or Sh13.5 billion to Sh146.5 billion.

Commercial Bank of Africa (CBA) also cut its interest expenses by 10.3 per cent to Sh8.95 billion, while its customer deposit volume grew by six per cent to Sh174.3 billion.

Co-operative Bank’s cost of funds fell by Sh0.5 billion to Sh11.7 billion or 4.1 per cent in line with the two per cent fall in customer deposits to Sh260 billion.

NIC Bank’s cost of deposits fell by eight per cent to Sh5.37 billion while its deposit base shrunk by only 0.4 per cent to Sh111.8 billion.

Customer complaints

The CBK had in October sent the banks a circular cautioning them against the conversion of savings accounts in reaction to the rate cap, after it received complaints from bank customers.

READ: Banks ordered to stop charging borrowers new transaction fees

“CBK has received a number of complaints from bank customers stating that their banks have unilaterally converted their savings accounts into transaction accounts, thereby losing the benefits that were accruing from those savings accounts,” the CBK had said in the October 3 circular signed by the director of bank supervision, Gerald Nyaoma.

“Any conversion of a savings, seven-day or fixed deposit account product to a transaction account by any institution should be reversed immediately.”

Banks were also accused of introducing new charges in order to increase their non-interest income, although their lobby, the Kenya Bankers Association, said that these were existing charges that customers were only becoming aware of in light of the heightened scrutiny of the lenders at the time.