Parliament’s move that gave banks half piece of the cake

Banks bargained for the whole cake — to have a free hand in pricing loans and also deciding on how much to give customers on billions of shillings in deposits.

Parliament granted them only the latter and customers are feeling it.

Several lenders such as Kenya Commercial Bank (KCB) #ticker:KCB have moved to cut interest rates on deposits to levels below the minimum 6.3 per cent that was in place before the changes in Finance Act abolished the compulsory pegging of rates on 70 per cent of Central Bank Rate (CBR).

The change signals a move by banks to price savings account based on trade-off between the safety that customers enjoy and the returns expected on the savings, according to Kenya Bankers Association (KBA) chief Executive Habil Olaka.

“If I am giving you more of safety on your deposits, then that should be compensated for by a lower return and vice versa. If banks want more deposits, they raise rates and when they see fewer opportunities to invest, they lower rates,” he said.

Olaka said the market-determined rates on deposits is one of the ways banks with stronger safety profile feel incentivised.

However, Consumer Federation of Kenya (Cofek) Secretary General, Stephen Mutoro says the action shows that banks are still leaning more towards profits than improving the lives of customers.

“They have been given a very small window and they are already exploiting customers to the core. Why would the big five banks be the ones to quickly reduce savings on deposits?” posed Mr Mutoro.

“We are vindicated for having opposed any nature of reforms on the rate cap laws. Nothing stops banks from going back to the highs of 25 per cent interest if ever the law will be removed in entirety.”

However, Mr Olaka says that market discipline has improved and in the absence of rate cap, only borrowers with risky profile above the provided rate will face higher credit costs.

“When the cap is removed, segments that are not accessing credit now will obviously be priced above the cap,” he said.

Finance Act

KCB has revised downwards the interest it will be paying for doing business with customers’ Sh525 billion deposits following the changes that were introduced in Finance Act 2018.

KCB put up a notice showing that it will now be paying customers an interest of seven per cent per annum on KCB goal savings account, down from 8.5 per cent.

This means that for a customer who has been earning interest of Sh85,000 for locking Sh1 million in goal savings account, their earnings will now be less by Sh15,000.

“We would like to inform all our esteemed customers that effective November 16 2018 and in line with the Finance Act 2018, the interest rates paid on your savings accounts will be as follows,” read KCB’s notice announcing the cut.

KCB cub account, a product targeting children and teenagers below the age of 18 years, will now earn savers five per cent interest per year, down from 6.3 per cent.

The same rate will apply for KCB Simba account while fixed deposit account will be six per cent.

High net-worth savers

Its closest competitor, Equity Bank, has also put its customers on alert, pointing to a likelihood of revision of rates from the minimum 6.3 per cent.

In a move that may only benefit high net-worth savers, National Bank of Kenya (NBK) has offered seven per cent interest per year on savings account with deposits above Sh2 million.

However, savers with deposits of between Sh50,001 and Sh2 million will get five per cent while those with savings of between Sh5, 001 and Sh50,000 will earn one per cent interest.

This means that savers in the low cadre with say Sh50,000 who lock their money in NBK for 12 months will now earn interest of Sh500 as opposed to the Sh3,150 they would have earned had the rate stayed at 6.3 per cent.

CBK governor Patrick Njoroge maintains that Kenya is wedded to a free-market economy and rate cap should be removed.

But banks’ latest reaction puts into doubts argument that they have improved in discipline as a sector and should be left to operate without rate cap, according to Mr Mutoro.