Customers at Consolidated Bank: Central Bank has reviewed categorisation, slashing the number of “large” banks from 22 to six. Photo/ANTHONY KAMAU
Kenya’s largest banks are the most expensive lenders and pay the least interest on deposits helping them to earn outsized returns at the expense of their customers, a survey by the banking sector regulator has revealed.
Medium-sized lenders charge the lowest average interest rates on loans at 13.85 per cent, large banks’ costs average 14.66 per cent while small financial institutions lend at 14.82 per cent according to the Central Bank of Kenya (CBK) survey.
“Large banks which should have been benefiting from economies of scale appeared to be trading on their significant market power offering the lowest deposit rate and maintaining the highest spread of 12.59 per cent in February 2011,” said governor Njuguna Ndung’u during the Monetary Policy Committee bi-monthly press briefing.
The spread is the difference between the deposit rate and the lending rate.
KCB, Barclays, Standard Chartered, National Bank, Co-operative and Citi were ranked Kenya’s biggest lenders by asset base in the 2010 Banking Survey report.
Prof Ndung’u, who has consistently urged banks to reduce their lending costs in order to promote wider economic growth, said large financial institutions had held their average lending rates constant at a time when their medium-sized counterparts have cut their interest rates “in line with falling risks.”
CBK said large banks are in a better position to reduce their average lending rates since they enjoy economies of scale which enables them to reduce the cost of mobilising deposits.
These cost savings ought to be pushed to borrowers in form of cheaper loans.
Ochieng Oloo, a banking analyst and chief executive of research firm Think Business, termed it “ironical” that large banks collect funds at lower costs than small and medium size banks yet are the most expensive.
Vast branch networks, big advertising budgets and the brand recognition of big banks reduce the costs of getting customer deposits by big institutions.
Wide branch networks are also an advantage for banks since customers can easily access services such as opening an account and making deposits.
For example, KCB which is classified as a large bank, had 168 branches in Kenya as of December 2010.
Advertising also helps large banks in brand building, added Mr Oloo.
“While a small bank will spend Sh20 per million collected in advertising, the cost for a large bank can be Sh5,” he said.
CBK ranks banks in terms of asset size with banks having Sh15 billion and above being categorised as large, medium-size banks have assets above Sh5 billion but below Sh15 billion and small ones have assets below Sh5 billion.
Prof Ndung’u said CBK has reviewed banks’ categorisation to the best international practices.
There are six “large” banks in Kenya as per the new categorisation, whose full details are yet to be released.
This is a reduction from the previous classification of 22 large banks.
Think Business, which carries out the annual Banking Survey uses branch number as the criterion and in the 2010 Survey it classified KCB, Equity, Barclays and Co-operative Banks as Kenya’s large banks.
The rolling out of agency banking is expected to further reduce costs since agents will enable customers make deposits and withdrawals and as such agents will act as de facto branches. By the end of September 2010, CBK had registered 4,393 agents.
The banking lobby group, the Kenya Bankers Association (KBA) said that CBK’s survey is a snapshot and not necessarily a trend showing that large and small banks are unresponsive to CBK’s push for lower rates.
Average lending rate
“When the next survey is done in two months’ time the situation may completely change,” said KBA chief executive Habil Olaka.
In December 2010, for example, small banks had an average lending rate 13.87 per cent while medium size banks and large banks charged 14.20 per cent and 14.95 per cent respectively.
Diamond Trust Bank managing director Nassim Devji said borrowers’ interest charges are determined by their risk profiles.
Mrs Devji, however, said banks in the medium sized segment are highly competitive, which explains the lower rates.
“The market segment for medium size banks is quite competitive,” said Mrs Devji.
Credit rating is also meant to reduce average lending rates since it will profile borrowers and weed out serial defaulters further reducing the costs of doing business for banks.
