Small lenders such as First Community Bank (FCB), Ecobank of Kenya and HF Bank dominate the list of banks offering lower interest rates in the latest regulatory disclosure that puts large players such as Absa and Equity Group among those with the steepest rates.
The Central Bank of Kenya (CBK) data on the average lending rates commercial banks offer show 27 of the 39 commercial banks have raised their overall rates in the three months to March.
The review puts the lowest rate at nine percent (FCB) and the highest at 17.6 percent (Credit Bank). The highest rate was 14.6 percent (Sidian) in December.
FCB, a shariah-compliant lender that was in March cleared to sell 62.5 percent stake to Premier Bank Limited of Somalia, had a uniform rate of nine percent for personal, business and corporate loans.
Ecobank Kenya follows with an average rate of 10.7 percent while HF and Access Bank Kenya follow with 11 and 11.2 percent respectively.
Credit Bank, with an average loan rate of 17.6 percent, tops the charts with higher rates followed by Middle East Bank (16 percent) and Sidian at 14.9 percent.
Absa and the country’s most profitable lender, Equity Bank Kenya, are ranked sixth and seventh, with interest rates averaging 14.2 percent and 14.1 percent respectively.
The banks’ disclosures to the CBK do not, however, factor in costs such as negotiation fees, legal fees and insurance, which typically increase the effective cost of servicing loans.
Banks usually post a breakdown of other fees on a website that was developed by the Kenya Bankers Association (KBA) and the CBK to enhance transparency.
Lenders that are more into personal and SME banking tend to charge more fees because the loan itself is smaller when compared with corporate loans.
Lenders with many repeat customers sometimes trim fees on subsequent loans.
Absa will adopt the risk-based pricing model on loans in the second half of the year after obtaining the CBK’s nod last year.
Equity had in January informed customers that it was reviewing its lending rates to between 12.5 percent and 21.02 percent after it started implementing the risk-based pricing in an environment of rising benchmark rates.
At the end of March, the CBK raised its benchmark lending rate to a five-year high of 9.5 percent from 8.75 percent as a counter-inflation measure that set the stage for costlier loans.
The jumbo rate hike was aimed at easing demand for credit in the hope of taming inflation, which dropped from 9.2 percent in March to 7.9 percent in April. Inflation, however, has remained above the government’s targeted upper limit of 7.5 percent for 11 consecutive months.
Another CBK meeting is set for today (Monday) at a time the KBA has called on the regulator to keep the benchmark rate unchanged.
Banks have been riding on the increased benchmark rates to revise their interest rates upwards, despite the prevailing economic difficulties that have seen defaults start mounting.
The average commercial bank lending rate breached the 13 percent mark for the first time since July 2018 in February to an average 13.06 percent from 12.7 percent in December and the upward momentum continues.
Interest rates are tipped to reset higher this year due to the increased adoption of risk-based pricing with more than 25 commercial banks having begun reviewing the cost of loans based on borrower risk profile.
KCB Group, whose approval is pending, disclosed during the release of first-quarter results that it had got CBK approval allowing KCB Kenya and National Bank of Kenya (NBK) to price loans depending on risk levels.
The CBK data shows KCB was by the end of March averaging Sh12.3 percent, making it the lender with the ninth friendliest price of loans alongside Standard Chartered Bank of Kenya which averages the same rate.
KCB Kenya's loan book hit Sh654.7 billion in March from Sh613.9 billion in December, making the volume the largest in the market after Equity which closed the quarter with Sh448.9 billion.
Co-op Bank averaged 12.9 percent in the review period, alongside NBK and Prime Bank while NCBA and I&M hit 13.6 percent.
The higher cost of credit among big banks has been linked to their strong pricing power based on a wide distribution network, multiple services and entrenched brands.
Small lenders on the other hand are forced to compete for customers by offering relatively cheaper credit. This is in contrast to the years before the rate cap when small banks had the highest cost of credit.
The small lenders were taking expensive wholesale deposits and adding a margin.
But the rate caps, which were in place between September 2016 and November 2019, boxed all banks to lend at a maximum rate of 14 percent for most of the period.