Big banks cartel hurting economy with expensive loans, says WB

A few big banks have gained a stranglehold on Kenya’s lending market, rendering it non-competitive with devastating consequences on the economy, casting the spotlight on the Competition Authority of Kenya (CAK) which has been investigating the sector since last year.

The high interest spreads that the commercial lenders continue to enjoy at the expense of the rest of the economy is clearest indicator of that lack of competition, the World Bank has said in its latest country report released two days ago.

“Large banks have the market power to maintain a wide (interest) spread at the expense of borrowers and depositors,” the World Bank says, even as it proposes that an increase in the number of banks and diversification of products would help pull down interest rates.

The report warns that negative real deposit interest rates (return offered by bank less inflation) has the impact of discouraging household and even corporate saving with dire consequences on the economy.

“The economy has largely relied on foreign savings as a source of new investments since 2007, while national savings have been declining,” the report says.

The World Bank’s findings and proposal that the number of lenders be increased should offer some food for thought for Central Bank of Kenya governor Patrick Njoroge, who has been campaigning for lower interest rates in the wake of a freeze on the licensing of new banks.

READ: CBK to unveil new loan pricing instrument

ALSO READ: Average personal loan rates climb to 18.3pc in Dec

Regulate lending rates

Kenyan banks have for a long time rejected reports of cartel-like behaviour in their midst that has seen Parliament make multiple attempts to regulate loan pricing by law.

The CAK launched investigations into the competitiveness of the lending market last year whose initial focus is the market structure (number of banks and market shares) and concluded that the structuring is adequate to support competition.

CAK director-general Wang’ombe Kariuki yesterday sought to clarify that the authority’s preliminary findings did not declare the current lending market pricing competitive.

“The first report never said the rates are competitive but only stated that structure is not the cause of whatever challenges are there,” said Mr Wang’ombe, adding that the authority launched a second study last month that focuses on issues such as consumer protection, information flow and transparency in billing’s “contribution to the current rates.”

READ: CBK says large banks flourishing as small players wobble under huge operating costs

The competition watchdog has appointed Switzerland-based Macmillan Keck and South Africa’s Acacia Consulting to survey the market.

Kiambu MP Jude Njomo has tabled in Parliament a Bill seeking to cap interest rates by law — the fourth time such an attempt is being made in six years.

Parliament is currently debating the Bill, which seeks to keep interest rates at no more than four per cent of the base rate set and published by the CBK. The bill also proposes to peg the minimum interest on deposits to at least 70 per cent of the base rate set by the CBK.

If enacted into law, lending rates would be capped at 15 per cent based on the current benchmark rate of 11 per cent. Currently, those borrowing personal unsecured loans are paying up to 25 per cent while savers are being rewarded 1.56 per cent.

Market dominance

Dr Njoroge has since January waged a consistent campaign against high costs of lending whose main focus has been the large banks and their misuse of dominance to influence interest rates.

“I think the issue here is one of market dominance —so they (large banks) will want to throw their weight around because they have a first mover advantage, a large network, big depositor base, wide array of services— so in a sense they feel comfortable that they don’t need to change,” Dr Njoroge said at a press briefing last month.

Six banks classified by the CBK as large lenders control half of the country’s total deposits, own 48 per cent of industry assets and booked 61 per cent of the profits. There are 41 operating banks in the country.

The central bank has also raised the red flag over the widening gap between the banking industry’s top performers and laggards, arguing it is likely to kill competition and public confidence in the sector.

Top-performing banks have been recording profit growth and rising returns to shareholders, even as the bottom players eat into shareholders’ wealth with falling profits and declining or static dividends.

Parliament’s multiple attempts to legislate interest rates have all failed to bear fruit mainly because of presidential stonewalling on grounds that such regulations have caused the banking industry to collapse in countries such as Nigeria.

It remains to be seen whether the latest attempt will succeed given the vigour with which senior Jubilee government officials, including deputy president William Ruto, have campaigned for low interest rates.

Commercial banks have resisted such attempts, choosing instead to offer alternatives such as the recent introduction of a standardised base lending rate but even this has failed to curtail the wide spreads and price volatility that still characterise the lending market.

The irony of Kenya’s lending market is that commercial banks have consistently posted huge and growing profits even as other sectors of the economy struggle under the weight of financing costs.

This year alone, a record 18 listed companies have issued profit warnings, with Standard Chartered Bank the only lender.

KCB reported a record Sh19.6 billion profit last week while Equity Bank posted Sh17.3 billion.