Since 2014, Kenyan banks have been using the annual percentage rate (APR) pricing mechanism to show borrowers how much their loans will cost, including charges and interest.
It has not always been like this, however. Previously, the lenders were regularly criticised over ‘hidden charges’ on loans that were included in the fine print of contracts, whose disclosure was only available to those savvy enough to ask.
Borrowers can now access the full breadth of charges on loans. But many of them still do not take the time to interrogate the terms of their loans, concentrating only on the interest rate applied on the debt.
Banks are well aware of this, and therefore market their loans largely based on the top line interest rate.
However, analysis of bank loans shows that the fees, levies and third-party charges add a significant cost, adding on average 6.4 percentage points on the average interest rate of 13.5 percent that tier one banks charge.
These additional fees and levies are due to banks, third parties like lawyers and valuers, and the government through excise duty.
Bank loan application/processing fees
Internal levies include appraisal/arrangement/negotiation fees depending on the bank.
Lenders levy application fees to cover administrative costs when processing a loan, which include aspects of the financial risk assessment of the borrower. Banks normally deduct this fee from the loan amount, although some will ask that the borrower pays it upfront.
These fees vary from lender to lender, and are normally pegged as a percentage of the loan amount—and can therefore add significantly to the total cost of borrowing.
Among the nine tier one lenders, these internal bank charges on an unsecured loan facility vary from two percent (DTB) to four percent (I&M Bank), with the others charging between 2.5 percent and 3.0 percent.
In addition to the processing fees, some lenders such as Co-operative Bank include a mobile notification charge.
Credit Life Insurance
A third-party mandatory fee that is meant to cover the lender in case a borrower is unable to service the facility as a result of death, job loss, disability or terminal illnesses that impair the ability to service a loan.
Also known as loan protection cover, it is taken out by the borrower on behalf of the lender, where they pay a premium against which the lender will be compensated in case of the borrower’s death, for instance.
The average annual insurance fee for a Sh1 million unsecured loan in a tier one lender is between 0.4 percent and 0.6 percent of the loan amount.
The lender will normally engage law firms to run due diligence on the collateral property to ascertain ownership, compliance with regulatory levies such as land rates and ensure that it is not charged on other loans.
The lawyers will also handle the process of charging the property on the loan, and the release when payment is completed. Some lenders will engage external legal help for drafting loan contracts, which add to the cost for the borrower. The borrower also covers the government fees for registering the security.
Valuation fees and stamp duty
Borrowers using land, vehicles or property as collateral for loans also incur costs related to valuation of these securities when taking up the loan. These valuation fees are also applicable for mortgage borrowers.
Banks need the valuations done so as not to be left short in the cover for the secured loan facilities.
Home loans also attract stamp duty, levied by the Kenya Revenue Authority (KRA) at 4.0 percent of cost of property or value on the open market, and an additional 0.1 percent of the loan amount upon making a charge on the property for collateral purposes.
The fees levied by banks for the loan are also subject to excise tax, which is levied at a rate of 20 percent. For tier one banks, where bank fees range between Sh20,000 and Sh40,000, the excise charge ranges from Sh4,000 to Sh8,000 per loan application.
Professional legal and valuation fees are also subject to VAT, levied at the standard rate of 16 percent and borne by the borrower.