Commercial banks’ interest expense dropped by Sh7 billion despite customer deposits growing by Sh300 billion to Sh2.9 trillion from Sh2.6 trillion, negating the expectation that amended banking laws could earn customers higher interests on deposits.
Data by the Central Bank of Kenya (CBK) show that the 11 per cent rise in customer deposits was not matched by an increase in interest expense following the revision of banking laws to compel banks to pay interest at the rate of 70 per cent of the Central Bank Rate (CBR) on term deposits.
For the entire 2017, CBR was at 10 per cent, meaning that banks should have paid at least seven per cent on all deposits in savings account, unlike before rate cap when interest on savings averaged 1.6 per cent.
Instead, interest expense on customer deposits dropped from Sh113.2 billion to Sh106.4 billion to confirm the March 2018 survey by CBK that the structure of deposits had shifted in favour of demand deposits on the onset of interest rate capping law.
This means that customers who rushed to entrust banks with additional Sh300 billion in a year or about Sh821 million per day, got a raw deal.
The rate of growth in deposits was fastest in 2017 compared to only Sh130 billion - or Sh356 million a day - additional deposits that customers gave banks in 2016.
The reclassification of accounts and setting of stricter terms for an account to qualify as term deposit helped shield banks from paying out higher interests on deposits.
CBK says that microfinance banks (MFBs) suffered deposit flight as customers rushed to give banks additional deposits hoping to benefit from improved rates. In the process, customer deposits for MFBs declined by 3.2 per cent to Sh38.9 billion.
In 12 months ended December 2017, total interest expenses dropped from Sh135.4 billion to Sh128.4 billion, making it to account for 36.4 per cent of the total banking sector expenses. This was down from 38.2 percent in the previous year.
“Interest expense as a ratio of income decreased from 30.3 per cent in 2016 to 26.4 percent in 2017,” said CBK.
The growth in customer deposits during the period was supported by mobilization of deposits through agency banking and mobile phone platforms, according to CBK.
For instance, agency banking registered 41.7 per cent jump in cash deposits from Sh538.2 billion to Sh791.7 billion.