The state of Kenya’s credit market is perennially pointed to as an economic crusher by business and consumers. Yet it is a tale that only ever seems to get worse, as the villains of the credit world compete for blame and excess, and the mass that forms the entire economy scramble for ever smaller pots of more expensive finance.
As it is, in April this year, our government finally announced its decision to relent on the interest rate cap, as legislation designed to be consumer friendly in limiting the rates Kenyans pay on debt. Certainly, the cap did not play out well for borrowers, converting expensive credit to, mostly, no credit at all.
Yet, as parliament’s most recent attempt to bring access to our financial markets founders, having provoked one of the country’s most serious clampdowns on credit yet, where does the hope actually lie for borrowers? By global standards, Kenya already competes in the top league for the scale of its interest rates.
Where a loan in the UK will likely arrive with an interest rate in single digits, prior to the interest rate cap, many Kenyan consumers were paying over 20 per cent, even up to 30 per cent. Bankers point to risk as the driver. Kenyans are more prone to default, apparently, than is the norm for global banking. But do the sums on interest rates on 25+ per cent and a sixth of all borrowers could disappear forever with debts unpaid and deliver a global kind of business return on the lending.
Yet, not one of the banks in Kenya reports a default rate that comes anywhere close to a sixth of borrowers, making for a mighty disjuncture between the claim that the country’s mega rates are driven by all those risky Kenyans.
Indeed, the difficulty with the risk argument, and for sure it exists, is multiple. Base one is the profits the banks deliver in Kenya, which come in way higher than norms elsewhere, from this apparently difficult and risky credit market.
And then there are the scale of the banking sectors’ operating costs, and of internal staff-driven theft, in a drain that is occasionally linked to figures that run into billions.
Banking is a business of risk, to be sure, but like all businesses its success rests on its own efficiency too. Pricing risk at levels that support sloppy security and excessive operational spending, poor and inefficient systems, and some of the most costly banking in the world isn’t actually about risk.
It’s about cost management. Into this climate, microfinance was to be our credit-access saviour, and yet, it too, charges interest rates that would be classed as usury in other markets.
Thus farmers, for whom a small capital injection of sometimes only a few thousand shillings, can transform a whole crop, may well pay back that starter cash twice over, making their need the driver of fat and profitable financial empires.
Even efforts to reduce risk through credit ratings, gathering repayment histories as a compulsory matter to shine light on provenly solvent and responsible loan repayers, appears to have done nought for our interest rates.
Then, enter the World Bank with its observation late last year that our credit market has additionally been disrupted by the scale and growth of public debt, galloping forwards as private sector lending stutters and stumbles - and it becomes hard to imagine a policy or time when normal SMEs can deal with a single late payment with a credit facility.
Beyond that, the era when Kenyans will get access to the personal credit that pays for the son’s MBA and delivers generational changes in earning power, is even harder to envisage. Saccos have helped, chamas too, in a D0-It-Yourself finance world where business norms just do not prevail.
But as we step back out into the banks hard-fought-for capless world, now replete with credit referencing services, but feeding a public sector debt monster, the difference between a Kenya that actually benefits and thrives on all the new infrastructure, and one that merely sputters along, will be the space where accessible, affordable credit should be. It’s time we built a viable credit industry.
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Note: The results are not exact but very close to the actual.
