Commercial banks have taken advantage of a legal loophole allowing them to load extra charges on customers’ loans to drive the cost of credit way above the current statutory cap of 14 per cent.
The average cost of loans based on the banks’ own online portal that discloses lending charges currently stands at 19.1 per cent, with some borrowers shouldering effective repayment rate of up to 26.5 per cent on a reducing balance basis.
The impact of the extra fees on the total cost of credit is evident on the www.costofcredit.co.ke portal that was created by the Kenya Bankers Association (KBA) and the Central Bank of Kenya to boost transparency of loan pricing.
The KBA data shows major variations in charges by different banks, resulting in the effective lending rate rising up to 26.5 per cent based on what it would cost a customer to take a one-year Sh1 million personal unsecured loan.
Extra charges that banks load on borrowers, besides the interest cost, include disbursement, legal, insurance and appraisal fees.
The KBA data shows that most of the banks are charging an interest rate of 14 per cent in compliance with the legal limit, but the level of fees wrapped in the loan products is the ultimate determinant of how high the annual percentage rate (APR) will be.
KBA’s chief executive, Habil Olaka, defended the bank charges, saying the online disclosure offers prospective borrowers a tool to shop for the best deals in the loans market, taking into account factors such as the cost of credit and value added.
“The website allows customers to take to task banks that appear expensive. Alternatively, they can simply go to those offering cheaper loans,” said Mr Olaka.
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Family Bank, Equity most costly
Family Bank and Equity Bank #ticker:EQTY are the two most expensive lenders due to their relatively higher charges.
A one-year Sh1 million loan from Family, for instance, costs a total of Sh140,085 or an effective interest rate of 26.5 per cent. This includes charges of Sh62,640.
At Equity, the total cost of credit is Sh132,445, representing 24.9 per cent of the principal. This includes fees of Sh55,000.
At the cheaper end of the spectrum, Guaranty Trust Bank (GTB) has the lowest loan pricing of 14.02 per cent, which is based on its nominal charge of Sh110.
While the fees are one-off items, they are a significant driver of profits and have attracted the attention of lawmakers.
The Banking (Amendment) Bill 2017, drafted hot on the heels of the interest rate cap, proposes inclusion of all loan processing charges in the lending rate cap.
The proposed legislation, which is still in abeyance, seeks to fix the current disparity between the official interest rate ceiling and the actual cost of credit in the market.
The KBA data shows that charges are now the most important adjustable factor for lenders seeking to raise their competitiveness in the loans market, with the 14 per cent interest rate adopted as the industry floor in pricing of credit.
Barclays Bank of Kenya #ticker:BBK, for instance, shed its label as the most expensive lender after reducing its charges by Sh14,840.
The bank, which charged a total of Sh135,245 for a one-year Sh1 million personal unsecured loan in June last year, has lowered the cost of credit to Sh120,405.
This came after the charges were slashed to Sh42,960 from Sh57,800 in what saw the bank drop from the top position to rank fourth in the list of most expensive lenders.
NIC Bank #ticker:NIC also reduced its fees by Sh7,500 to Sh36,500, cutting the total cost of credit on a similar loan to Sh113,945 from Sh121,445. The move saw the bank improve from third to fifth position in the list of most expensive institutions.
KCB #ticker:KCB, the country’s biggest bank by assets, left its charges unchanged and maintained its close-to-median ranking with a cost of credit of Sh104,945 equivalent to an effective lending rate of 19.3 per cent.
The KBA data shows that the pricing of loans is highly arbitrary, with lenders of varying sizes and funding models distributed across the list of the most expensive institutions.