Ideas & Debate

KBA’s cost of credit calculator doesn’t reflect market realities


KBA chief executive Habil Olaka (left) and KCB chief executive Joshua Oigara at the launch of the credit calculator in July 2014. FILE PHOTO | NMG

In yet another effort to address the thorny issue of the cost of credit in Kenya, the Central Bank of Kenya and the Kenya Bankers Association have recently partnered to launch an online portal that allows borrowers to compare the cost of credit from commercial and microfinance banks.

Dubbed the Cost of Credit Calculator, the website seeks to give borrowers an estimate of the total cost of credit (TCC) arising from a consolidation of the fair estimate of each lender’s interest rates, bank charges and fees as well as third-party costs that are specific to each product.

Unfortunately, this noble initiative has been repurposed to ‘naming and shaming’ the most expensive banks rather than fulfilling its initially intended scope of helping borrowers make informed decisions when seeking credit.

Banks levying the highest charges have been named in various platforms — an inappropriate endeavour in my view given that there is nothing wrong with banks charging comparatively higher levies as long as the said levies are justifiable and fall within the Banking Act’s prescribed interest caps.

The question, therefore, is why the Total Cost of Credit initiative is falling short of its intended purpose. This is mainly because it fails to contextualise borrowing as a need, is not cognizant of consumer behaviour in as far as borrowing is concerned and most importantly, it overlooks a number of factors informing each bank’s pricing of the interest rate components.

Basically borrowing is a need, which has been described as a state of felt deprivation.

The vast majority of Kenyans borrow because they have a need to fulfil — not because banks offer affordable financing facilities.

For this reason, their financier of choice will primarily be the one that moves fast to meet that need. In this world of borrowing, affordability of credit facility or lack thereof, comes secondary to the customers’ ability to access the loan.

READ: Big banks are Kenya’s most expensive lenders

On this basis, a customer in need of a personal unsecured loan to pay school fees, for instance, would irrefutably approach a financier that guarantees a 24-hour turnaround time, subject to successful underwriting, regardless of whether the said financier levies a higher premium than the industry average.

Similarly, a customer seeking an asset financing loan to purchase a motor vehicle would approach a financier with an established and convenient value delivery network that will shorten the duration it takes to access the motor vehicle, regardless of whether this value addition costs more relative to competitor banks.

Borrower behaviour

The Total Cost of Credit initiative is partially, and wrongly so, premised on the assumption that current and prospective borrowers use the information it purveys to automatically switch to more affordable financiers.

The truth of the matter is that borrowing is more often than not based on an established banking relationship, the depth of the said relationship being proportionate to its margins.

Building on existing relationships, banks strive to further establish full partnerships with their customers by cross-selling and upselling products, thereby seeking to fully satisfy their customers’ needs and to avert the risk of customer multi-banking.

It is thus highly unlikely that a customer who does all his banking in Bank-X for instance, will choose to seek financing from Bank-Z on the basis that the latter advances more affordable credit.

The customer would instead choose to leverage on his existing banking relationship to seek a financing facility rather than start another relationship altogether in a bid to access “cheaper” financing.

Consequently, a proactive customer relationship management system would offer concessions, pricing included, in a bid to satisfy existing customers’ needs, thereby providing superior customer value and satisfaction over its competitors.

Interest Rate Pricing

Of all the underlying factors that the Total Cost of Credit initiative fails to address, the influence of a bank’s interest rate pricing is the most apposite.

By comparing banks’ pricing relative to each other and presenting this comparative information as a basis of decision making to the ultimate consumer without providing sufficient information as to how banks arrive at their interest rate pricing components, the initiative can at best be described as giving undue advantage to certain banks over others.

READ: Banks almost triple loan sizes for good borrowers

Unknown to the larger Kenyan public, a bank’s decision to price a credit facility, although capped by law, is not arbitrary.

A raft of factors are considered before arriving at the price to be levied on a facility, key among them being the bank’s cost of funds and the quantifiable risks associated with advancing a facility to a particular client over another.

Comparing the credit pricing of all banks on a product basis is far from objective because it assumes that all banks operate on a level playing field in as far as financial strength and risk appetite is concerned.

The notion therefore that some banks offer a better alternative than others because their credit facilities are ‘cheaper’ is grossly misinformed. This is because such an assertion is based on an overly superficial component of customer experience — pricing.

Had the Total Cost of Credit initiative envisaged an objective depiction of the manner in which credit facilities are made available to the Kenyan citizenry, features such as credit facility precedent conditions, turnaround time, augmented facility components and terms of financing would have been factored in, in addition to facility pricing.

It would be misleading for customers to solely rely on the Total Cost of Credit information when deciding on which financial intermediary to seek credit from.

Such a consideration will mean they have missed the bigger picture in as far as customer value proposition is concerned.

It is more punitive from the lenders’ perspective given that the ultimate goal of any profit-seeking commercial venture should never be to provide a cheaper market offering, rather one with a value proposition that justifies the higher pricing set by efficiently and effectively satisfying customer needs.