Spire Bank has slashed its insurance premium financing (IPF) rate by 6.5 percentage points to eight per cent, indicating that the new low-interest rate regime is now expanding to auxiliary loan products offered by banks.
Banks are offering the IPF at as high as 14.5 per cent, which puts it slightly above the maximum capped rate of 14 per cent the lenders can charge for normal customer loans.
IPF carries lower risk for banks compared to normal customer loans since the lenders can redeem the outstanding balance of the insurance premium from the insurer in case the customer defaults on payments.
This has seen premium financing attract lower rates compared to normal loans offered by banks.
“Although the IPF rates vary based on banks and their customers, in most cases they will be lower than those of other loans. The risk is not high since they can cut their losses once a customer shows that he or she is unable to service the debt,” said insurance expert Isaac Ng’aru of Ng’aru and Associates.
Banks in Kenya have expanded their IPF programmes in tandem with their forays into the bancassurance segment, using the financing option as a means of pushing the uptake of their insurance offering by customers who would otherwise be unable to afford lump sum premium payments.
“It is a useful leverage tool when trying to push the uptake of the bancassurance products,” said Mr Ng’aru.
The lenders normally demand an initial deposit equivalent to just one loan instalment before disbursement of the entire premium amount to the insurance firm, meaning customers need not liquidate other assets in order to pay for insurance.
Banks have been ushered into a new regime of lower interest rates following the signing in August of a new law capping the cost of loans at no more than four percentage points above the Central Bank Rate.
This rate ceiling means that the lenders have to become innovative in their competition for customers, unlike previously when there was wider room for advantageous loan pricing, especially for lenders who could access cheaper funds.
Spire Bank, which is owned by Mwalimu Sacco and Sameer Investment Group, is partnering with Fidelity Insurance and Invesco Assurance to provide the IPF to its customers.
“The scheme open to premiums as low as Sh25,000 with no maximum limit,” said Spire Bank managing director Tim Gitonga, adding that the bank is targeting individual, SME and corporate customers.
Kenya’s insurance penetration remains low at about 2.9 per cent, compared to the continental average rate of about 3.5 per cent.
In contrast, Kenya’s financial inclusion rate stands at 75 per cent, indicating that people are readily taking up other financial services while shunning insurance.
This, however, means that the potential for growth of the insurance sector in Kenya is high, especially in motor vehicle and property insurance as Kenyan’s continue to access higher levels of disposable income that is being directed to buying cars and property.