Absa Bank Kenya #ticker:ABSA has joined small lenders to offer the cheapest personal loans, breaking ranks with other big banks that have continued to issue relatively expensive credit facilities.
An Absa customer taking a Sh1 million, one-year personal unsecured loan today will incur a total credit cost of Sh71,807.
That is the same as the finance costs one will face at First Community Bank (FCB) and Housing Finance (HF) for a credit facility of a similar size and duration. Bank of Baroda is the cheapest at Sh70,794.
Absa’s major rivals including DTB and Equity Bank #ticker:EQTY meanwhile price a similar loan from Sh95,807 to Sh114,057. Absa was previously among the most expensive lenders.
Nearly all the banks have an interest rate of 13 percent or slightly below, with the divergence in the total cost of credit primarily based on differences in other discretionary charges.
The loan pricing estimates are derived from the cost of credit website developed by the Kenya Bankers Association (KBA) and which seeks to enhance transparency in the formal credit market.
The KBA says the estimates are a starting point for a prospective borrower interested in taking a loan, adding that contacting a bank directly will give the official loan pricing.
Absa’s Sh71,807 charge for the Sh1 million, one-year personal unsecured loan represents pure interest payments at a rate of 13 percent over the life of the loan.
The credit facility is repaid monthly, with the interest charged on a reducing balance.
Equity Bank also charges an interest of 13 percent or Sh71,807 but has a higher total cost of credit of Sh114,057 for a similar credit facility. This is due to additional charges of Sh42,250 including loan application fees.
The KBA says banks may also collect fees for other parties including lawyers, insurers and the Kenya Revenue Authority.
Banks charging only interest, however, do not collect internal or third-party fees.
Other big banks with a higher total cost of credit-driven by internal and external charges include DTB and I&M Bank #ticker:IMH , which will ask for Sh95,807 and Sh100,160 respectively for a similar credit facility.
NCBA #ticker:NCBA will charge a total of Sh104,807, KCB #ticker:KCB (Sh107,207), Co-op Bank #ticker:COOP (Sh111,929) and Standard Chartered Bank Kenya #ticker:SCBK (Sh112,745).
The pricing trends show that most big banks price their loans nearly the same, indicating minimal competition.
Their huge lending capacity also means they are indifferent to the cheaper credit terms offered by the small institutions.
Assuming more customers flocked to the cheap small banks, they will not get the loans they require. Bank of Baroda, currently offering the cheapest loans, had issued loans of Sh51.9 billion as of September 2021.
Equity Bank Kenya, meanwhile, lent Sh367.5 million in the same period, with the big banks generally dominating in lending capacity and other measures including customer numbers.
Customers have been found to show high levels of loyalty to their banks, indicating that a majority are not shopping around for better deals and are more interested in simply accessing loans.
The latest customer satisfaction survey by KBA shows that nearly eight out of every 10 respondents indicated that they would recommend their banking service providers to others.
“Finally, customers were asked to indicate whether they would recommend their respective banks to other customers. This question sought to assess the level of customer’s satisfaction with a bank’s services,” the association says in the survey published last week.
“It also captures a customer’s willingness to recommend the said bank’s services to people closest to them — friends and family. Based on the findings, it was established that nearly eight out of every 10 (77.6 percent) of the respondents answered in the affirmative — indicating their willingness to recommend their service providers to others.”
For most banks, the fees they add to the interest charges is one of the means of protecting their margins as the industry continues to experience a de facto lending rate control regime.
The interest rate caps were abolished on November 7, 2019, after three years, allowing banks to raise the cost of loans for customers who present a higher risk of default.
But the Central Bank of Kenya (CBK) stepped in administratively, requiring lenders to submit new loan pricing formulas that will guide their interest rate variations.
To date, most banks have not received approvals for their risk-based lending proposals even after multiple discussions with the regulator.
Part of the discussions involves an explanation of factors that determine the pricing of loans such as the cost of funds, return on assets, operating costs and the risk premium.
The CBK, which in 2019 warned banks against reverting to punitive interest rates of more than 20 percent in the post-rate cap regime, wants every lender to justify the margins they put in their formulas.
The regulator appears apprehensive of lending rates rising to the high levels before the rate cap years and which were the catalyst for the introduction of the interest rate controls.
During the freewheeling years, most banks were charging interest rates above 15 percent and the most aggressive ones were approaching 30 percent.
The standoff seen in the proposed risk-based lending system has left the average lending rate in the industry stuck at an average of 12.16 percent as of December, according to CBK statistics.
This is lower than the rate available on some government debt securities, which have no credit risk, unlike households and businesses which can default in one out of 10 cases.
The latest infrastructure bond, for instance, came with a fixed interest rate of 12.96 percent and was oversubscribed by banks and other investors.
Adding charges to interest or ordinary loans, however, enables banks to match or exceed returns in the medium to long-term government debt securities.
A one-year, Sh1 million personal unsecured loan at 13 percent interest plus charges of Sh42,250 results in a total cost of credit of Sh114,057 or an annual percentage rate (APR) of 21 percent.
This means that shorter-term loans are more profitable for banks because of the ability to load the charges each time a customer takes a new credit facility.
For long-term loans, the fees appear only once and therefore curtails the frequency of recycling the charges.
Most loans to retail customers, including those offered through mobile banking platforms, have a term of one to three months and some extend to one year.
There is no cap on the fees that lenders attach to loans, allowing the institutions to vary it to suit their needs to raise margins or win more customers.
The KBA says the annual percentage rate, driven by the discretionary charges, is the most relevant metric in comparing loan costs.
“There are various costs associated with a loan. These costs are in addition to the interest rate component, and range from bank fees and charges to third party costs, such as legal fees, insurance and government levies,” the association said.
“Because loan applicants will tend to focus only on the interest rate when making a loan decision, banks have proactively adopted the Annual Percentage Rate or APR model which converts all direct costs associated with the loan (also known as the Total Cost of Credit) into one number.”
With the APR, borrowers are empowered to comprehensively compare different loan products on a like-for-like basis, based on the total cost of the facility and therefore make better-informed credit decisions, KBA added.
Small banks, which are typically the cheapest, use their favourable loan pricing as one of their key competitive advantages to win customers since they lack the advantages of big banks including a large client base, wider distribution network and a larger marketing budget.
While Absa is a big bank by financial measures, its customer numbers are closer to those of the small institutions than the large lenders and its move to offer cheaper loans could be a strategy to grow its market share.
Absa had 250,000 loan accounts in December 2020 when those of Bank of Baroda, FCB and HF stood at less than 12,000 each according to the latest CBK Bank Supervision Report.
NCBA Bank Kenya had the most loan accounts at 7.3 million though a majority of them are microloan accounts offered through its mobile banking services.
KCB was second with 1.8 million loan accounts and was followed by Co-op Bank (800,000), Equity (700,000).
For retail clients, ease in accessing loans is valued more than the cost of the credit facilities. This is demonstrated by the rising popularity of alternative lenders including mobile and digital platforms, which charge vastly more exorbitant interest rates on their short-term loans.
Some of the platforms charge annualised interest rates of more than 300 percent, with the players saying they need a higher risk premium because the loans have no collateral and have higher default rates.