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Equity shakes market with mobile phone loans rate cut

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An Equity Bank branch in Nairobi. PHOTO | FILE

Equity Bank yesterday pulled down interest rates charged on mobile phone-based loans, breaking ranks with rival Kenya Commercial Bank (KCB) and Commercial Bank of Africa (CBA), as it moved to comply with the new law capping the price of loans.

Equity Bank chief executive James Mwangi said customers borrowing through the lender’s Eazzy loans (its mobile phone-based credit offering) will be charged at the maximum rate of 14.5 per cent per annum on a reducing balance – a figure that translates to approximately 0.65 per cent per month.

“You can’t partner with a non-bank institution - a fintech or telcom – and pretend you can be outside this law – it says directly or indirectly. The issue of mobile is clearly spelt in this law,” said Mr Mwangi.

The new law states that “A person shall not enter into an agreement to borrow or lend directly or indirectly at an interest rate in excess of that prescribed by law.”

KCB and CBA, who have both partnered with Safaricom’s M-Pesa, have held that mobile phone loans do not fall under the provisions of the law and have retained the old pricing.

READ: Banks insist new rate caps not applicable to mobile-based lending

Mobile loans, disbursed at annual rates of between 60 per cent and 100 per cent, have been a huge source of income for commercial banks and their coming under the capped interest rate regime could mean a big fall in interest income.

CBA said it would retain its loan facility fees unchanged at a flat rate of 7.5 per cent in a communication sent out to M-Shwari customers yesterday.

The bank, however, said it would pay M-Shwari deposits a return as per the new law at 7.35 per cent, which is 70 per cent of the Central Bank Rate (CBR).

CBA group managing director Isaac Awuondo has defended the bank’s position, arguing that it charges a transaction fee and not an interest rate.

KCB has argued that mobile loans are unique products that fall under micro lending and therefore stand outside the reach of the new law.

“The law does not speak about microfinance institutions at the moment and our mobile lending is currently a micro-business product in the industry,” KCB Group CEO Joshua Oigara said in a previous briefing.

KCB charges a flat interest rate of six per cent for 30-day loans, five per cent of 60-day and four per cent for three-month credit.

Co-operative Bank, which offers M-Co-op Cash, has been mum over the issue even as the management said it was still weighing the implications of the law.

Co-op charges a facility fee, at 10 per cent upfront for a monthly loan, 12 per cent for a three-month facility and seven per cent for its monthly business loan and secured personal loan.

Equity Bank previously charged interest rates of between three and nine per cent based on the credit risk of the borrower as computed by the bank.

Mr Mwangi conceded that the lender would take a hit in interest margins, which it hoped to recover through higher volumes.

The bank has set aside Sh100 billion for lending to the end of the year as it expects a rush of borrowers spurred by the lower prices, he said.

The bank has lent Sh27 billion through mobile phones, having disbursed more than 400,000 loans each month.

There are minimal costs associated with mobile loans, which are processed digitally without human intervention and paperwork.

CBA had disbursed a cumulative Sh40 billion through M-Shwari by the end of last year to 12.6 million customers.

This indicates the bank earned Sh3 billion from the product based on the flat fee charged.

M-Shwari had mobilised Sh7.6 billion in savings as at end of last year. KCB M-Pesa has disbursed Sh10.3 billion in loans to its customers since March last year. 

Equity Bank said it would also apply 14.5 per cent on credit cards and its group loans extended to women and youth.

Mr Mwangi said that its deposits products would also attract an annual return of 7.35 per cent.

The bank cited five deposit accounts which will earn interest being those associated with school fees accumulation, group accounts, fixed account and purely saving accounts dubbed Jijenge account.

Persons saving with the different accounts will, however, be required to hit a specific threshold depending on the type of the account so as to start earning a return.

The minimum threshold is Sh2,000.

Banks have in recent days rushed to reclassify deposit accounts to avoid paying the huge interests on client funds.

Some banks have told their customers that only fixed accounts are qualified to benefit from the deposit rate.