Kenya’s large banks are charging the highest interest on loans even as they retain depositors on small payouts.
A new Central Bank of Kenya (CBK) report shows the six top banks are squeezing borrowers while using their dominance in the skewed market to pay less for deposits.
The 10th report of CBK’s Monetary Policy Committee shows that the influential financiers enjoy an average interest spread of 15.3 per cent compared to 11 per cent for the small banks. Interest spread is the difference between the price at which a bank offers a loan and the cost it paid for the deposits used for lending.
Effectively, the big lenders are raking in nearly 40 per cent more in profit margins than their smaller competitors.
CBK data shows the majors offer the most expensive credit at 19.7 per cent and pay the lowest for deposits at 4.4 per cent. The industry average lending rate is 17.87 per cent and deposit rate is 6.39 per cent.
The wide margins have been key drivers of high profits reported by commercial banks as they are able to cater for their operational costs and retain much more. In the five months to May, the banks had made profits before tax of Sh48.7 billion during a period characterised by sluggish economic growth and surging bad loans.
“There is still scope for banks to reduce their spreads further given the various initiatives implemented by CBK and Kenya Bankers Association (KBA) to reduce the cost of doing business,” reads the report.
The huge margins have seen the large banks dominate the other players to grow their share of industry profit to 65.5 per cent, equalling Sh70.6 billion, up from 62.3 per cent a year earlier.
KCB, Equity, Co-operative, Barclays, Standard Chartered and CFC Stanbic are the only ones classified as large banks in an industry of 43 players divided into three categories by the regulator. Fifteen banks are classified as mid-sized while 22 banks are small.
Analysts said paying of low deposit rates to the majority of account holders in the country negatively affects the nation’s savings culture while the high lending rates negated the monetary policy authorities’ efforts to revamp the economy through cheaper access to credit.
“They do not encourage savings because of the low deposit rates, which affect the long-term economic development,” said Vimal Parmar, head of research at Burbidge Capital.
Kenya Bankers Association (KBA) said the different banks target specific segments of the public which advised their pricing and marketing strategies.
“Each one has their own target. A borrower will not just move from one lender to the other on the basis of price but will also consider whether the bank meets his needs,” said Habil Olaka, chief executive of KBA.
Large banks which enjoy a stronger brand are able to attract both retail and corporate customers who fear smaller brands may collapse with their cash. However, over the last decade the ‘flight to safety’ factor has greatly diminished due to industry stability. Mr Olaka dismissed the notion that banks were merely profiteering without concern for the common man.
“You need to align the motivation of the managers to those of the shareholders. There is impact of looking at the short-term profits, but shareholders are looking at the long term,” he said.
Large banks were said to charge the higher lending rates as they were the main holders of unsecured loans.
“They have an aggressive lending policy in terms of unsecured loans and have a wider deposit base, which allows them to source funds cheaply,” said Francis Mwangi, head of research at standard investment bank.
The large banks are also better capitalised than their smaller counterparts, giving them room to reject expensive deposits.
“They have more bargaining power. Because they are more capitalised they don’t rely on deposits for cash to lend but the smaller ones need the deposit to lend,” said Mr Parmar.
Some of the mid- and small-sized banks reported a drop in profits, if not losses, last year, all of them attributing it to high cost of funds. CBK noted its frustrations in urging the banks to reduce their lending rates saying it “has also continued to engage the CEOs of commercial banks through the KBA on this issue through bi-monthly forums”.
CBK has reduced its indicative rate by more than half in the last one year to 8.5 per cent from 18 per cent but the cut has not been transmitted to the public through lower rates. Banks have argued their rates were a factor of many issues not just the Central Bank Rate (CBR).
“Banks have a committee which makes decision on the pricing considering the macro-economic conditions and the strategy of the bank,” said Mr Olaka.
Some of the initiatives introduced by CBK to cut the cost of doing business for banks include agency banking, which allows banks to collect deposits from far-flung areas without opening costly branches, licensing mobile phone financial platforms that leverage on technology to reduce transaction costs and operationalisation of credit reference bureaus, which have reduced the costs of information search and risk profiling process. CBK has also opened currency centres across the country, reducing costs associated with transporting cash incurred by the banks.
“Some of the initiatives are ongoing and it takes time for the benefits to filter through,” said Mr Olaka.
High interest rates accompanied by huge profit announcement by the banking sector have been a source of public outrage with the issue finding its way to Parliament. Legislators have in the past two years tried to amend the law so as to cap the interest rates charged by the banks.
“We have not given up but want to change it a bit. Yesterday I met with all the Cord [the Opposition Coalition for Reforms and Democracy] governors and encouraged them to introduce women and youth funds in their counties so that they do not have to approach the banks,” said Gem MP Jakoyo Midiwo, who has sponsored the past two amendments seeking interest rate caps.
Kiambu County governor, William Kabogo, has already set the pace by creating a Sh1.2 billion fund in his budget.