Cartel-like behaviour blamed for high banking charges

Tuesday February 9 2016

Kenya Bankers Association CEO Habil Olaka. He says banks face taxation or even the prospect of their funds being withheld if they do not comply with the new rule requiring new account holders in Kenya to to complete tax forms by the United States Internal Revenue Service. PHOTO | SALATON NJAU

Kenya Bankers Association CEO Habil Olaka. PHOTO | SALATON NJAU  NATION MEDIA GROUP

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Kenyan financial sector regulators and economic experts have raised concern that the banking sector could be promoting collusion to stifle healthy competition.

The experts said this could explain the high cost of credit and astronomical transaction fees that banks charge customers.

These concerns have driven the Competition Authority of Kenya, (CAK) to embark on an antitrust study to establish the level of competitiveness in the banking sector.

Ahead of the study, CAK director general Kariuki Wang’ombe appeared to confirm that consumers are locked into some banks because the cost of switching lenders is prohibitive. The phenomenon known as ‘club effect’ is thwarting customers’ free choice for banking services.

“Most of the customers are being tied to some banks because the switching costs become high even when the services are not doing well,” he said on Friday.

Mr Wang’ombe whose agency recently busted a price-fixing ring in the outdoor advertising agencies said Kenyans should be free to choose their preferred banks.

Economists generally believe that effective competition among banks should drive down banking fees and prices of loans and ensure that depositors are compensated fairly.

“If a Kenyan consumer is in bank A how easy is it to move to bank B? That flexibility is of concern to the Authority and our study will seek to establish this. What we (regulators and banking industry) should be focusing on is having a standard sharing of customer information by the banks,” Mr Wangombe said.

“The second phase of our study is focusing on consumer protection issues. These include switching of banks, the transparency of the billing and the transparency of the interest rates.”

At a press conference with journalists on January 21, Central Bank of Kenya Governor Dr. Patrick Njoroge appeared to express displeasure with the high banking fees as he noted that interest rates had continued to rise despite the indicative rates being steady.

Dr Njoroge said it is peculiar that the “unwarranted” increases in interest rates by banks are more pronounced among large banks even though they have sufficient liquidity. He accused the large lenders of taking advantage of their dominance to arbitrarily increase costs.


“I can only speculate and I think the issue here is one of market dominance. So they (big banks) will want to throw their weight around because they have a first-mover advantage, a large network, big depositors’ base, wide array of services,” said the governor.

University of Nairobi economics lecturer, Prof. Michael Chege said while the Kenyan banking sector may not necessarily have active banking cartels which collude to fix prices, the market structure is dominated by a few big banks. This, he said, could be playing a role in influencing pricing of banking services.

“There are no cartels in the Kenya banking system plotting high lending rates and low interests on bank deposits. Yes, we have had a problem of a wide spread between interests paid on deposits and what banks charge on loans but in my view this has to do with the dominance of a few big players in the market — a market structure known as “oligopoly” in which the lenders charge the rate being charged by the market leader,” said Prof Chege.

He said regulators should move urgently to enhance competition in the sector.

“It is good that the Competitive Authority is looking into this; the goal should be to introduce more competition that will help reduce the spread. That is already happening as the governor is saying. Cartels suggest an illegality but I do not think it is the case here,” said Prof Chege.

Consumer lobby group Consumer Federation of Kenya, (Cofek) told Smart Company “there is a serious crisis in the non-transparent and high pricing by banks and second, that the big five banks are abusing their dominance.”

Amid the mounting concerns on lack of competition in the banking sector, banks lobby the Kenya Bankers Association (KBA) chief executive Habil Olaka dismissed the claims of lack of competition and existence of collusion in the Kenyan banking sector as “far-fetched.”

“Without pre-empting what the governor meant, I think he may have been pointing to possibilities rather than established facts,” he said.

When you see some specific banks are enjoying spreads over and above what the other banks are able to enjoy and you see one common factor between the banks is their size then you start guessing could it be because of their size. And then you more or less hypothesize that could this be because they are abusing their size,” said Mr Olaka.