Cost of credit still high in Kenya despite interest rate cap

NAIROBI, July 24 (Xinhua) — The cost of credit in Kenya remains high despite the introduction of a law to cap commercial banks’ interest at 4 percent above the Central Bank rate.

The law came into force in September last year and was expected to make credit affordable especially to small businesses.

The Central Bank Rate currently stands at 10 percent, which means interest rates in the East African nation should not be higher than 14 percent.

However, latest industry data showed Monday that the financial institutions are charging between 14 and 21 percent, with the rates being pushed up by their fees.

The result is that Kenyans are not accessing cheaper credit as expected, even as banks tighten their purses and channel funds to the government through Treasury bills and bond.

For personal secured loans, the lenders are charging between 14 percent and 21 percent, according to the data from the Kenya Bankers Association.

Big banks like Equity Bank, Kenya Commercial Bank and Barclays Bank are the most expensive, with their interest rates ranging from 17 percent to 21 percent.

This is incomparable to smaller banks which are charging at between 14 percent and 15.1 percent.

On the other hand, mortgage rates stand at between 18.2 percent and 21 percent, with the big banks again being the costliest.

For personal loans, bank charges account for up to 5.5 percent of the total cost while for mortgages, the fees comprise of 9.3 percent of the total loan.

“The larger banks in the industry, which control a substantial amount of the loan book, are the costliest, and hence are able to sway the market, given the low customer bargaining power,” noted Cytonn, a Nairobi-based investment firm.

The firm observed that loans with a one-year duration, both secured and unsecured, should attract the maximum chargeable interest of 14 percent, but banks have managed to increase the true cost of credit with charges varying depending on the institution.

Since the introduction of interest caps, there has been a decline in access to credit, with the private sector credit growth hitting an eight-year low of 2.1 percent in May compared to 25.8 percent at its peak in June 2014, and a five-year average of 18 percent.

This decline has been attributed to the fact that banks are shunning high-risk customers and investing in risk-free treasuries, which offer better returns on a risk adjusted basis.

“The loan growth in commercial banks in Kenya has also been affected, with listed banks recording a growth of 7.1 percent in Quarter One of 2017, compared to 16 percent during the same period in 2016. The most affected banks in terms of loan growth are those with a focus on the retail market, the segment that the law was meant to protect, indicating the rate cap might not have achieved its intended objective,” noted Cytonn.

To correct the market, Cytonn is calling for the removal of interest caps, given that the law has become a hindrance to credit growth, evidenced by the continued decline of private sector credit growth.