Bank borrowers will soon have a common pricing tool that will offer the true cost of loans and allow them to compare lending rates offered by the various commercial institutions.
The Kenya Bankers Association (KBA) said commercial banks in the country are expected to adopt the Annual Percentage Rate (APR) pricing mechanism by July 1, ushering in a new phase of transparency in the costing of products by lenders.
APR is a measure that shows the complete and true pricing of loans and takes into account the set interest rates and other compulsory charges like legal fees, insurance costs, valuation fees, and government levies in calculating the borrowing rate.
This will allow borrowers to easily compare lending rates among rival banks in what will up competition in the banking sector—which is currently under probe for uncompetitive behaviour.
“As an industry, we are enhancing pricing disclosures in order to enable bank customers to make more informed choices. This is one of the mechanisms embraced by banks to address issues relating to easing access to credit,” Habil Olaka, the CEO of KBA said on Wednesday.
Commercial banks in the country have been under the spotlight amid claims of hidden costs that left consumers disadvantaged.
Banks use the interest rate model that has been widely been criticised for not containing full disclosure of certain transaction costs.
For instance, a creditor may be offered a loan with a lower interest rate on paper but have higher upfront costs that if taken into consideration makes its facility actually more expensive.
Central Bank of Kenya requires banks to provide loan applicants with a breakdown of the total cost of credit that include bank charges and third-party costs as well as repayment schedule.
Under the new model, banks will disclose the total costs associated with the loan, the loan repayment schedule; and the APR, which takes into account the interest rate component; bank charges and fees; and third party costs, including legal fees, insurance costs, valuation fees and government levies.
Lending rates currently average 18 per cent compared to a high of 25 per cent from the third quarter of 2011, when the bankers mooted the idea of APR.
The Kenyan banking sector recorded growth in the quarter ended March, compared to the fourth quarter to December 2013.
Latest data by Central Bank of Kenya (CBK) showed that gross loans advanced grew by 5.6 per cent to Sh1.7 trillion in March from Sh1.6 in December.
The APR comes as the competition watchdog investigates banks over the pricing of their products in what could see far-reaching reforms in the sector.
The Competition Authority of Kenya is 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 banks’ complex tariff structure, which makes prices of their services not easily comparable; with customers finding it difficult to switch from one bank to another. The agency has tapped a South African firm, Genesis Analytics, to carry out the inquiry.
It will also investigate whether banks discriminate between different entities such as corporate firms and individuals when negotiating prices for loans to customers.
The Central Bank of Kenya’s Bank Supervision Report based on the 2012 financial results shows that six banks hold 54 per cent of market share for loans and deposits.
The top six banks earned 66 per cent of the total profit reported by the industry. The top 10 held 70 per cent of assets and deposits and made 82 per cent of the profits in 2012.