Don’t get your hopes up, there’ll be no cheap loans any time soon

When Erastus Marwa opened a savings account with a local bank, he did not expect to quickly become known among the staff.

Within a few months, the lender’s guards and tellers knew him by name, thanks to his saving habits.

You see, he would pop in twice every week to deposit money. By the end of every month, he would have saved at least Sh30,000.

His diligence was not just for fun. A solid vision and plan was behind his deposits: “I wanted to boost the health of my account before taking a Sh500,000 loan to improve my boutique business and start a car washing outfit,” he says.

Thirteen months later, his account reflected Sh400,000 in savings. “The bank gave me a three per cent interest on my savings.”

Mr Marwa was, therefore, shocked two weeks ago when he went to apply for a loan and the bank hit him with a 19 per cent interest rate.

BAD JOKE

“I thought the credit officer was playing a bad joke on me. I asked him how come my loan margin could be higher than the bank’s reference rate of 9.13 but he curtly said that was how the bank was charging,” he told Money.

“I tried to negotiate but he was adamant that there would be no lowering of the cost.” Mr Marwa is currently shopping for another bank, hopefully one with friendlier credit rates.

Mr Marwa is not the only potential borrower irked by banks’ reluctance to cut lending rates. In fact, in the past few years, the sky-high cost of credit has been the cause of bad blood between local lenders and borrowers.

On one hand, the interest commercial banks pay for deposits has remained pea-sized while the interest charged on third-party borrowers has grown exponentially.

CHANGE TREND

Between 1991 and 2003, the average interest rate in Kenya was 14.6 per cent, with an all-time high of 84.67 per cent in 1993 and an all-time low of 0.83 per cent in September 2003. Since then, the interest rate has gone through the roof.

In 2004, it hit 25 per cent. For a short while, there were hopes that the trend would change when, during the first week of last month, the Central Bank of Kenya (CBK) announced the annual percentage rate (APR) pricing mechanism and the Kenya Banks’ Reference Rate (KBRR) as the new credit measuring tools.

According to National Treasury Cabinet Secretary Henry Rotich, “this reference rate for all banks will be examined every six months to avoid volatility in the market.”

Currently, the cost of credit in Kenya is determined by the Treasury Bill rate, liquidity and cost of funds, creditworthiness, and collateral.

The reference rate was calculated as an average of the Treasury Bill rate and the Central Bank rate. The CBK rate is at 8.95 per cent, with the banking sector’s loan book at over Sh1.75 trillion.

REMAIN SKY-HIGH

With CBK setting the KBRR at 9.13 per cent, borrowers trooped to the banks in hopes of getting cheaper loans. But as Money found out, lending rates have remained sky-high.

Perhaps the only reprieve has come from Standard Chartered Bank, but according to the bank’s CEO, Lamin Manjang’, the lowering of the rate was not a result of the KBRR and APR loan pricing mechanisms.

“This was a campaign by the bank to reduce our lending rates,” he says. Since July 15, the bank has been running a campaign on lower interest rates for personal and business loans and mortgages.

“In the plan, Stanchart lowered its lending rate to 14.9 per cent from 16.9 per cent for personal loans. Home hunters also got a reason to smile as mortgage rates were reviewed to 10.9 per cent from 12.9 per cent. ”

According to Mr Manjang, borrowers who may not take advantage of the bank’s campaign will get their loans at the old rate of 16.9 per cent.

“Those who took loans under the campaign will enjoy their loans at KBRR+1.77 margin. This margin will remain fixed for the duration of the loan.”

PERSONAL LOANS

Nonetheless, if the KBRR falls below 9.13 per cent to say 9 per cent, their loans will go down to 9 per cent + 1.77 percentage margin.

A spot check by Money has established that local lenders continue to issue loans at between 16 per cent and 24 per cent. At Cooperative Bank, personal loans are going at 16 per cent while non-subscribers are required to repay at 17 per cent.

At Equity Bank, personal loans have been priced at 21 per cent while Commercial Bank of Africa’s interest on personal loans stands at 17 per cent.

At Barclays Bank, unsecured personal loans are going at 19.9 per cent while at National Bank of Kenya, unsecured loans are priced at 24 per cent.

For business loans, KCB has the cheapest package at 16 per cent. In contrast, StanChart is giving business loans at 21 per cent.

With mortgages, KCB’s rates have decreased to 12.9 per cent from 14.5 per cent, while I&M, Chase Bank, and Consolidated Bank are lending mortgages at 15.5 per cent from 16.5 per cent, 17 per cent from 18 per cent, and 18 per cent from 19 per cent respectively.

USED CARS

Barclays Bank is lending at 15.9 per cent while National Bank of Kenya’s mortgages are trading at 18 per cent.

For borrowers looking for loans to buy new cars, Equity Bank and Chase Bank offer the cheapest loans at 9.5 per cent, with KCB at 17 per cent, and Cooperative and NIC banks at 18 per cent. For used cars, NIC Bank is offering loans at 20 per cent.

While the one or two per cent difference may seem negligible, it is not so when one does the maths.

For instance, according to the cost of credit calculator launched by the Kenya Bankers Association, a loan of Sh500,000 at 21 per cent would attract about Sh25,692.83 monthly repayments for two years, giving the bank Sh116,627.81 profit.

At 19 per cent, the same loan would earn the bank a profit of Sh104, 903.14 with monthly repayments of Sh25,204.31.

For borrowers who signed for loans at StanChart at 14.9 per cent, the same loan will fetch the bank Sh81,269.8, with monthly repayments of Sh24.219.58 for two years.

BANKS RELUCTANT

Why are the banks so reluctant to cut interest rates? According to Isaiah Opiyo, a training manager at Tolerance Employee Financial Advisors, the solution to the high cost of living needs a legal framework more than what the KBRR tries to offer.

According to financial expert James Njenga, local banks determine their base lending rate based on weighted average cost of funds, operational costs, profit margins, and inflation.

Mr Mohamed Hussein, a financial expert, says that what local banks are doing to avoid lowering rates is to price KBRR risk while pushing the difference between it and their true base lending rate.

“If a bank was previously charging a base rate of 13 per cent and a risk premium of 7 per cent, giving a lending rate of 20 per cent, it could now charge the KBRR 9.13 per cent and 11 per cent risk premium and, therefore, lend at the same 20 per cent.”

According to Mr Njenga, the only achievement that APR and KBRR may attain is open competition.

“These rates will at best only open up competition among local banks. But with the margin chargeable remaining ambiguous, our banks are going to maintain their lending margins at highs equivalent to their pre-KBRR rates,” he says.