advertisement
Markets

Banks face probe by competition watchdog

Central Bank of Kenya. The Competition Authority is keen on reforms in the industry to promote fair pricing of loans and financial services. Photo/FILE
Central Bank of Kenya. The Competition Authority is keen on reforms in the industry to promote fair pricing of loans and financial services. Photo/FILE  NATION MEDIA GROUP

Commercial banks are facing investigations into their price-setting practices that could see the Competition Authority recommend far-reaching reforms in the industry to promote fair pricing of loans and financial services.

The State agency said on Friday it was seeking to establish the extent of competition in Kenya’s banking sector, following concerns that interest rates spreads — at an average of between nine to 13 percentage points in the past five years — are too wide.

The survey will also look into the complex banks’ tariff structure, which makes prices of their services not easily comparable; with customers finding it difficult to switch from one lender to the other.

“We want to look into any competition issues that may exist in the country’s entire banking industry with the aim of finding out if they are internally generated and as a result of the power wielded by financial institutions vis-a-vis the consumer’s lack of power,” said the Competition Authority’s chief executive, Wang’ombe Kariuki.

The watchdog has teamed up with non-governmental organisation Financial Sector Deepening (FSD) Trust to conduct the survey before deciding what action to take. The Central Bank of Kenya’s Bank Supervision Report based on 2012 financial results shows that six banks hold 54 per cent of market share for loans and deposits. The top six lenders earned 66 per cent of the total profit reported by the industry.

advertisement

The top 10 banks held 70 per cent of assets and deposits and made 82 per cent of the profits in 2012.

Mr Kariuki said there have been complaints about concentration of market power and the study would reveal whether this was indeed the case.
Bankers and consumer organisations, however, hold sharply contrasting positions on the matter. While the Kenya Bankers Association (KBA) welcomed the study, it said the sector is transparent and competitive enough.

The Consumer Federation of Kenya (Cofek), on the other hand, said the sector has cartel-like behaviour.

“We welcome the study. For us, there is adequate competition in the industry. There is free entry and exit and the sector is more competitive than in neighbouring countries,” said KBA chief executive Habil Olaka.

Mr Olaka said he expected the study to establish whether there were non-competitive practices.

Mr Olaka said that the interest rates spread were lower in Kenya than in the region, but noted that it could be higher than in other parts of the world.

He said that the high spread in Kenya was related to the cost of funds and obstacles related to collateral such as the long period it takes to register land. Stephen Mutoro, chairman of Cofek, said it was clear that the banking sector operated as a cartel that did not price its products competitively. “There is no need to research on something as obvious as the high spreads and lack of competition in the banking sector.

‘‘It is abundantly clear that what we have is a cartel and what we should be hearing from the Treasury is how they are going to deal with it,” said Mr Mutoro.

Discriminatory exemptions

He said the malpractices in the banking industry were also a result of regulators tolerating them, to the point of giving discriminatory exemptions to some banks on certain laws of banking.

To carry out the research, the watchdog advertised for expressions of interest from qualified consultants last Friday. The study is expected to take three months to complete once the service providers are selected.

Mr Kariuki said the Treasury had notified the CBK of the project and the researchers would also rely on the bank’s intelligence when compiling their report.

“There have been complaints that interest rates spread compared to deposits are not fair and this is one of the issues we will look into,” said Mr Kariuki.

Mr Kariuki said the study would investigate whether banks discriminate between different entities such as corporate firms and individuals when negotiating prices for loans to customers.

“Abuse of dominance is a criminal offence and (we could take) those we find doing this to court and charge them,” said Mr Kariuki.
The authority would also take administrative measures such as imposing fines and penalties depending on the scale of the offence.

advertisement