Commercial banks in October won the argument against rate caps on customer loans, freeing them from the constraint of how much interest they can load on a loan.
Last year, the law mandating the minimum deposit rate they had to pay on interest earning accounts was also removed.
While these two developments have re-established a free market for credit, there is concern that the lenders are taking advantage by paying less for deposits.
The fall in the savings rates to a 36-month low is no coincidence, coming after the rate floor was removed. It also points to a wholesale shift of customer funds to transactional accounts.
At an average of just 4.58 percent, the lender are eyeing a spread of over 10 percentage points if as expected they issue new loans at between 15 and 18 percent.
Banks are therefore effectively punishing depositors for entrusting their money to them in pursuit of higher profits, and are conveniently ignoring the fact that they are using these same funds to generate returns for shareholders through loans.
Ideally, we expect that the rise in interest rates on customer loans now that the rate cap has been removed will be matched by a corresponding rise in deposit rate.
While we are not against the lenders enjoying a higher profit margin, it should not be at the expense of depositors, but rather as a result of their creativity in expanding their customer base and other lines of revenue.
We are therefore calling on the sector regulator, CBK, to keep an eye on the funding side of the sector even as it enforces adherence to the banking charter that is meant to prevent predatory lending practices.
Indeed, we hope to see a return to the days when banks would actively compete for deposits by offering better rates than competitors.
The offshoot of paying higher returns for deposits will be the entrenchment of a saving culture among Kenyans.
This will help build resilience in the financial sector, and improve the country’s ability to invest internally in important sectors. The onus is thus on the large banks that control the bulk of the deposits and deposit accounts to lead the way in paying a fairer rate to a larger percentage of depositors.