Kenyans don’t scout for cheapest credit in the market

June 3, 2016
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The Central Bank of Kenya’s (CBK) decision to publish the average lending rates for commercial banks has raised hopes this will trigger lower interest rates/FILE
The Central Bank of Kenya’s (CBK) decision to publish the average lending rates for commercial banks has raised hopes this will trigger lower interest rates/FILE

, NAIROBI, Kenya, Jun 3 – Banks have been blamed and accused of high headedness in lowering interest rates in the country.

But could you as a consumer be the reason that the rates remain high?

Overview
  • “We did not find any evidence that the top tier banks are coercing each other to put interest rates at a certain position. We did not find an uncompetitive market structure,” the CAK Director General Wang'ombe Kariuki said.
  • However, according to the inquiry, credit consumers do not scout for the cheapest credit in the market.
  • “Credit consumers need to be educated on how to scout for cheaper interest rates. For example at CAK, we compared the rates between a top tier bank and a tier three bank for a fixed deposit interest rate on a certain amount of money we had and were not going to use it in the near term. The tier three bank had a double digit interest on the deposit while the tier one had a single digit,” Kariuki explained.

There have been reports of a cartel in the banking sector that has only seven banks holding 80 percent of Kenya’s population cash but a study by the Competition Authority of Kenya states otherwise.

READ: 7 banks hold 80 percent of Kenya’s population cash

“We did not find any evidence that the top tier banks are coercing each other to put interest rates at a certain position. We did not find an uncompetitive market structure,” CAK Director General Wang’ombe Kariuki said.

However, according to the inquiry, credit consumers do not scout for the cheapest credit in the market.

“Credit consumers need to be educated on how to scout for cheaper interest rates. For example at CAK, we compared the rates between a top tier bank and a tier three bank for a fixed deposit interest rate on a certain amount of money we had and were not going to use it in the near term. The tier three bank had a double digit interest on the deposit while the tier one had a single digit,” Kariuki explained.

In most segments, the inquiry indicates that the market is dominated by between 4 -5 large players and a very large number of small players.

Also, formal and regulatory barriers to entry into the sector are probably lower than comparative countries.

According to the inquiry, there is little evidence that margins or profits in the banking industry are at the top or bottom of peer group country comparisons.

The Central Bank of Kenya’s (CBK) decision to publish the average lending rates for commercial banks has raised hopes this will trigger lower interest rates.

CBK’s move aims to promote transparency in pricing of credit by commercial banks.

Publication of average lending rates for commercial banks is expected to enable the public make informed borrowing decisions.

The publication follows a meet between CBK Governor Patrick Njoroge and bank chief executives over the need for lower interest rates in the economy, suggesting that the margins made by commercial banks were too high.

Njoroge had termed the high bank lending rates as troubling; pointing out that it was unfortunate that large banks were hiking their rates despite the liquidity in the market.

According to ABC Capital Research Analyst Joshua Otiende, CBK seems to be forcing banks to lower interest rates, having taken all other necessary measures.

“The move will trigger competition in the market and will see banks revise their interest rates as borrowers will be more inclined to borrow from banks that have lower interests,” Otiende told Capital FM Business citing that the move will see banks lower interest rates in the long run.

In the last quarter to December 2015, KCB Bank had the lowest rates for corporate loans over five years at 12.5 percent while Ecobank had the lowest on business and personal loans at 14.9 percent and 10.8 percent respectively for loans repayable over five years.

On personal loans repayable between one to five years, Habib Bank had the lowest interest at 8.4 percent as at December 2015.

“However, we have seen a need for consolidation in the sector. Every time there is turbulence in the sector, a deposit flight from smaller banks to bigger happens and lenders prefer credible, strong banks. Smaller banks can join hands to form bigger banks that can compete,” Kariuki concluded.

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