Bank staff tap insider loans faster than ordinary borrowers

Rising interest rates saw borrowers hold back on new loans.

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Employees of top banks tapped new loans at a faster pace than directors and other borrowers in the half year ended June 2024, an analysis has shown, as friendly borrowing rates shielded them from 18-year high market rates.

An analysis of the financial results of the country’s nine largest banks shows that the staff loan book grew by 5.44 percent or Sh4.47 billion to Sh86.58 billion in period under review, recovering from a 1.8 percent decline in the preceding similar period last year.

The 5.44 percent growth means employees from the top banks— KCB, Equity, Co-operative Bank of Kenya, NCBA, Stanbic Bank, Standard Chartered Bank of Kenya, Absa Bank Kenya, DTB and I&M—were tapping new loans at a faster pace than directors, shareholders, and associates as well as the rest of the borrowers who are not insulated from the rise in interest rates.

This is the first time in at least four years that the employee loan book has outpaced other categories in terms of growth as interest rates on many loans have soared above 20 percent.

This was after the Central Bank of Kenya (CBK) raised the benchmark lending rate four times between March 2023 and February 2024.

Banks typically offer employees loans at below-market rates as part of the benefits package, which also includes pension, wellness, and medical insurance.

Equity Group, for example, disclosed that it was lending to employees at an average interest rate between six percent and 10 percent per annum by the end of 2023, being over half the maximum 26.74 percent interest it was charging customers by February this year. 

Rising interest rates saw borrowers hold back on new loans.  This, coupled with the revaluation of dollar-denominated loans as the shilling gained against the dollar, contributed to the slowed growth in loans and advances to customers even as loans to staff grew faster. 

During the half year ended June 2024, the loan book of directors, shareholders, and associates dipped by 9.6 percent or Sh6.69 billion to Sh62.76 billion as the loans to the rest of borrowers—disclosed under loans and advances to customers—grew by 1.8 percent to Sh3.674 trillion.

The 1.8 percent or Sh66.3 billion growth in loans and advances to customers for the nine lenders was slower than the 21.9 percent or Sh664.8 billion growth that the same lenders had posted in a similar period last year.

The fastest jumps in insider loans tapped by employees were seen in I&M where the figure jumped by 23.7 percent to Sh3.6 billion, followed by DTB where the jump was 20.9 percent to Sh2.05 billion.

NCBA employees increased their borrowing by 14.6 percent to Sh7.6 billion while Equity staff upped their credit appetite by 12.7 percent to Sh17.26 billion.

In terms of the value of outstanding insider loans to employees, KCB had the highest at Sh22.36 billion, although the figure grew by only 1.2 percent.

Only Stanbic Bank Kenya employees bucked the trend with a 5.7 percent decline to Sh3.86 billion.

Under the CBK Act and CBK prudential guidelines, the regulator allows insider lending but with caveats to prevent abuse. Banks are allowed to lend to the CEO or directors with the approval of the board.

Loans to the CEO or directors must be on terms similar to those offered to ordinary customers and the bank has to notify the CBK of each approval. A three-month default disqualifies such persons from holding office.

“Only loans and other facilities to staff members should be within schemes approved by the board,” the prudential guidelines read in part.

In the year ended December 2023, three banks were in violation of the Banking Act for breaching the single insider borrower limit of 20 percent of the core capital. Two others breached the total insider borrower limit of 100 percent of the core capital.

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