Kenya’s most expensive, cheapest loans revealed

Absa Bank Kenya #ticker:ABSA leads a group of large lenders offering the most expensive loans in the market, according to disclosures that rank small institutions as the cheapest providers of credit.

A borrower taking Sh1 million personal secured loan for one year from Absa will incur a total credit cost of Sh143,007.

The same loan size on similar duration at Sidian Bank will cost Sh140,807, Ecobank Kenya (Sh121,407), Family Bank (115,624), Standard Chartered Bank Kenya #ticker:SCBK (Sh115,000) and Equity Bank (Sh108,057).

The ranking is based on tabulations of banks’ charges on the website developed by the Kenya Bankers Association (KBA) and the Central Bank of Kenya (CBK) to boost transparency and competition in the lending market.

The data shows that interest rates charged by the 36 banks in the database range from 11 percent to 13.63 percent, with the variations in the total cost of credit driven largely by differences in non-interest charges.

Bank of Baroda, for instance, is ranked the cheapest with a cost of credit of Sh60,580 that reflects pure interest charges.

The small lender does not levy charges like legal, insurance and processing fees, according to the cost of credit portal.

These non-interest charges are what have inflated total lending costs among most of the big banks.

By eschewing the special fees, other small lenders have joined Bank of Baroda to offer the cheapest loans.

Credit Bank, First Community Bank, Housing Finance #ticker:HFCK and Kingdom Bank are all pricing a Sh1 million personal secured loan at Sh71,807, almost all of it being interest charges.

KBA’s chief executive Habil Olaka says that the portal has become more reliable over time.

“It is updated as the information changes at the banks,” Mr Olaka said.

“They (banks) are reminded every two weeks but the update on the total cost of credit is meant to be as it changes. Initially it used to be every two months in line with the monetary policy meetings.”

KCB #ticker:KCB is the only big bank ranked among the group of second-cheapest lenders, with the lender also pricing a similar-sized loan at Sh71, 807.

KCB has disclosed non-interest charges in the portal for secured loans, but information on its website indicates it charges a negotiation fee of 2.5 percent and taxes.

The data shows that most of the big banks continue to offer the most expensive debt despite enjoying access to cheap deposits and alternative revenue streams, including fees on millions of transactions.

Disclosures by top banks such as KCB, Equity and Cooperative Bank #ticker:COOP have in the recent past shown that at least 70 percent of their deposits do not attract interest.

Equity, for instance, said the cost of its Sh691 billion as at the end of last September was at 2.2 percent, down from 2.4 percent in September 2019.

Analysts have linked the higher cost of credit among big banks 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 marks a reversal compared to the years before interest rate when small banks had the highest cost of credit.

This was based on the small lenders taking expensive wholesale deposits and adding a margin. 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.

There has been no sharp rise in interest rates despite the removal of lending rate controls, with the CBK lowering its benchmark lending rate and warning banks against arbitrary rate hikes.

However, the non-interest charges levied by most banks are raising the actual cost of funds for borrowers.

This is demonstrated by the total cost of credit at Absa being Sh82,427 more than at Bank of Baroda despite the interest rate charged by the former being only two percentage points higher.

Absa’s total cost of credit is broken down into interest (Sh71,807), negotiation fees (Sh33,000), legal fees (Sh25,000), credit life insurance (Sh6,600) and excise duty (Sh6,600).

KBA says the cost of credit indicated on the website may not reflect the actual loan repayment burden, adding that it serves as a starting point for borrowers shopping for the best deals.

“The estimate provided is not a loan contract and is a non-binding approximation of the cost of a bank loan in an effort to help prospective borrowers estimate loan costs,” the association says on the website.

“If you are interested in a bank loan, you should contact a bank directly for an official loan estimate as bank charges and fees may vary.”

Some lenders, for instance, have omitted their non-interest charges in a move that may make their cost of credit appear cheaper than they actually are.

Interest rates have been pointing downwards for the better part of last year, but the Covid-19 disruptions that led to massive layoffs and pay cuts have hurt the appetite for lenders to grow loan books.

The average lending rate touched 11.75 percent in September last year —the lowest since early 1980s— as banks cut appetite for lending in the wake of the Covid-19 pandemic that had raised defaults. The figure rose slightly to 12 percent in January.

The general fall in lending rates was partly triggered by the cut in CBK benchmark rate from nine percent in November 2019 to the current seven percent.

Banks have been seeking to raise interest rates on loans to riskier customers but the CBK has stalled the efforts by not taking action on the proposals.