Data from the Central Banks shows that lending interest rates declined on average in 2014 across all banks. PHOTO | FILE
What you need to know:
The difference between the price of loans charged by the large banks and what they were rewarding their depositors stood at 9.71 per cent in September, down from 10.1 per cent in August and highs of 17 per cent in 2011, according to data from CBK.
Small banks offer the best reward for savers with a return of 7.44 per cent in September while medium-sized lenders paid seven per cent.
The interest spread enjoyed by large commercial banks fell below the 10 per cent mark for the first time in four years following increased competition for deposits.
Data from the Central Bank of Kenya (CBK) shows that the difference between the price of loans charged by the large banks and what they were rewarding their depositors stood at 9.71 per cent in September, down from 10.1 per cent in August and highs of 17 per cent in 2011.
Large banks control more than half of the Kenyan banking sector’s total deposits and assets, allowing them to pay lower deposit rates compared to other lenders as they are viewed to be more secure while also charging more for their loans owing to customer loyalty.
“Lending interest rates declined on average in 2014 across all bank categories while average deposit rates increased for medium and large banks,” said CBK governor Njuguna Ndung’u.
The current base lending rate for all banks is predetermined by the CBK’s calculation at 9.13 per cent.
As at end of September, the large banks were paying an average of 3.9 per cent for deposits, up from 3.75 per cent in August.
Small banks offer the best reward for savers with a return of 7.44 per cent in September while medium-sized lenders paid seven per cent. The small and medium-sized banks have, however, not increased their deposit rates in the last three months.
Analysts attributed the increase in rates to competition for large long-term deposits, which the banks need for long tenure loans.
“Majority of lending opportunities are on long-term lending, especially infrastructural loans, so they have to book not just large deposits but deposits that are long term,” said head of research at the Standard Investment Bank, Francis Mwangi.
CBK data shows the cost of funds for banks increased at a faster pace than other expenses in the nine months to September. Interest expenses constituted 32.7 per cent of the industry’s operational costs in the period compared to 30.8 per cent last year.
Notably, interest rates on government debt paper, which usually guides corporate depositors in the reward to bargain for from banks, have been flat.
The banks, however, have to also compete with corporate bonds issued by institutions seeking long-term debt. Britam, CIC, UAP and NIC Bank have issued corporate bonds in the recent past.
Listed real estate developer Home Afrika has received approvals to issue a Sh900 million bond by end of year.
Wide interest spreads enjoyed by lenders in the country have been a source of concern to the government and have caused public outcry as they allow banks to post record profits at the expense of savers and borrowers.
Investigations by the government last year led to the establishment of the standard base rate to make pricing more transparent and improve competition.
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