Category Archives: bank charges

Kenya Bankers launch Cost of Credit Calculator

Last week, the Kenya Bankers Association (KBA) in conjunction with the Central Bank of Kenya launched the cost of credit loans calculator feature.

It is available on the KBA website and as an app (in the google store) and one important feature is that it allows borrowers to see the annual percentage rate (APR) – the true cost of a loan, which can vary greatly from the original loan interest rate that is advertised. It also enables customers to download repayment schedules and see the entire amount that has to be paid back to a bank (the total cost of credit).

Many loan customers pay their installment and get to what they consider the end of the loans only to find they owe a bit more. This is because they only go by the amortization rate (schedule of principal and interest) but leave out other charges and fees which are incurred in securing the loans – such as legal fees, insurance, government taxes and fees, valuation, security and other loan fees.

At the time of drawing a loan, there’s a temptation to forego paying many of these upfront, and ask the bank to add the myriad charges on to the loan – but these can add up over the duration of the loan.

This comes after an earlier attempt by the KBA to get all banks to price their loans around a single rate – the Kenya Bankers Reference Rate – KBRR. This was abandoned after interest rate caps law was passed in 2016.

Shared Branches are the Bank Branches of the Future?

Despite new mobile, ATM, and internet channels, customers still need to come into bank halls quite a bit, as seen by the queues at beginning and end of each month. A lot of this is because customers need to bring and remit payments that end up going to other banks either via direct deposit, cheques, or RTGS. Does the money need to physically move? No But the customers do, going from building to building to do single transactions at many banks.

It helps if you have a building like Sarit centre which is an attractive banking destination because it has many bank branches under one roof, with much more in adjacent buildings.

New malls (the Hub, (remodeled) Westgate put bank branches upstairs and  have one corner where they put all the ATM’s . Presumably, banks are nice tenants at malls as they pay for space over many years and the branches bring in a lot of foot traffic to other shops.

zeepo-agent

A Zeepo agent handles a dozen different payments.

But for banks, there is a lot of redundancy. Every bank that has a branch network incurs a repeat of the same costs of staff, security, cash handling & transit, advertising signs, stationery, surveillance & alarms, insurance, etc. They also have building leases, insurance, and fees per branch or outlet – such Kshs 65,000 (~ $650) per year for an ATM license in Nairobi County.

Big banks have invested in big branch networks, but can smaller banks share halls in new neighborhoods or towns like Eastleigh and Kiserian that experience rapid growth, and the banks have to catch up?. Shall we see a bank hall or post office hall in such a place with 20 desks, and 20 sets of staff for 20 different banks? Can banks share a hall like a Huduma centre which houses several different government departments in one hall who each second some staff there to serve their customers in such a centre. Agents like Zeepo do it and there are shared branch halls in the US for cooperative societies.

It is certainly possible. They already share ATM’s (through Kenswitch), payments switches, card networks (Visa, MasterCard) – so why not building space? his way they can share the cost of security, which can be handled by armed guards outside, and leave a friendly customer –facing interface inside that is devoid of bullet-proof glass (like some Uganda bank halls)

  • This piece (h/t @AgostaL) which highlights that bank products will always be around, also has some stats on bank branches in the US ..The United Kingdom, the United States, Spain, and a host of other countries are seeing the lowest number of bank branches in decades.
  • While here in Kenya, CBK’s 2015 annual report notes that ..(while) the number of bank branches increased from 1,443 in 2014 to 1,523 in 2015 .. the slowdown in physical bank branches expansion is partly attributed to the adoption of alternative delivery channels such as mobile banking, internet banking, and agency banking.
  • What does it take to open or close or share a branch? Section 8 of the banking act requires that No institution shall open in Kenya a branch or a new place of business or change the location of a branch or an existing place of business in Kenya without the approval of the Central Bank.

How banks are innovating around interest rate caps

With the capping of interest rates at 4% above the CBK rate comes an opportunity for banks to innovate and protect their income streams. They can do this through increased focus on mobile-based short term credit facilities as well as non-funded income streams.

More people can now afford loans. However, banks are reluctant to offer loans to existing customers who previously met their criteria. More requirements need to be met by customers in order to access the same services. Customers now have a tough time accessing credit cards and (un)secured loans. Perceptions on risk determine who gets the facility with riskier clients getting the short end of the stick.

An F-Type Jaguar at RMA Motors, Kenya

An F-Type Jaguar at RMA Motors, Kenya

Fixed and call deposit facilities are also now accessible to fewer people. New requirements such as that you need to hold an account for a certain amount of time with the bank in order to access fixed deposit services are restricting customers. Long tenures for fixed deposits have also been halved. Call deposits have been put on hold in some cases.

Banks are moving towards shielding themselves from the risk of default that will be brought about by a flood of people who can now afford to take out a loan. Collateral will become a requirement for credit facilities that did not have this requirement before. This is based on the real assumption that there will be a significant degree of default from this windfall.

Banks have also started investing more in Treasury Bills that are risk free and offer roughly the same return that they would by loaning funds to individual customers. This may be a short term move as banks wait for the waters that have been stirred up to settle. It is telling that the 364-day T-Bill is getting the most attention.

Mobile applications that increase accessibility and convenience for bank customers are currently not a significant source of funds. However, they offer an opportunity for lenders as they try to leverage on the volume of loans they have the potential to advance. MShwari-type loans could be the answer to protecting the banks’ funded income. More banks will be willing to join in advancing MShwari-type loans. This will keep people with low credit quality within the formal banking industry. Since most of them are from the unbanked population, they will be afforded some protection from predatory lending by shylocks as has been feared. Only people from selected (read known and established) companies are able to access the same loan facilities that were available to everyone. Likewise, entrepreneurs classified as less risky won’t see a significant change in their access to the facilities that they are used to. Banks have had to cut down on staff that was needed to sell credit facilities. With MShwari-type loans, some of these jobs can be saved.

More focus will be given to non-funded income streams that exist such as prepaid cards. Prepaid cards are touted as a secure way to carry cash. KCB and NIC Bank are two institutions that have put a lot of effort in making these cards mainstream.

Bankers also have the option of contesting this legislation using KBA. They can do this if they can prove that the new rates are making their business unprofitable. This could see interest rate revisions on new and existing credit facilities once in a while. An unseen consequence of this is the Monetary Policy Committee might lose its independence since they have to take into consideration bankers.

In summary, more focus will be given to customers who meet new requirements set by banks. Innovations will also be necessary to drive income growth going forward. After all, operating in white water creates opportunities in making great leaps.

Newton Kibiru, Business Development at Grant Thornton Kenya

Why SACCO’s Won’t Replace Banks

The banking interest rate cap came into effect last week and some banks, like Coop and KCB have set out to comply with the new rates for new loans. But some people have been saying that they will shift to SACCO’s if banks cut back on borrowing that they consider too risky to make at below the 14.5% set by the new law.

SACCO magazineBut SACCO’s won’t really replace banks.  SACCO’s (savings and credit society societies) in which members register, save, and borrow are very good vehicles for customers who understand their needs and have definite investment goals. They are able to borrow loans, at lower rates than banks and often without the need for collateral, usually by having other members guarantee each other.

But the amount members can borrow is  limited, usually by how much they have saved (you cannot borrow more than five times your savings, how much they have outstanding or how many loans they already have. Also you can’t borrow until you have been a member and built up savings for about six months. They require regular deposits, usually each month so this work with salaried people or disciplined savers. They also work well with rural societies and farmers, though some in sectors like coffee have been plagued by debts following crop failure or society mismanagement.

Finally, some SACCO’s uch as Mwalimu, Harambee, Kenya Police, and Afya have over ten billion shillings in assets, but most SACCO’s are smaller than banks and don’t have the credit to lena or range of products that banks do to lend to millions of borrowers. While some SACCO’s have bank-like services like cheque books, and debit cards, they also don’t have the range of financing – trade finance, overdrafts, credit cards that  bank customers are used to.

Kenya Interest Rates Part IV – Coop Bank Leads

Ever since the banking amendment act was passed by parliament virtually all banks have announced reductions of interest rates to comply with the last KBRR – and all have reduced by 0.97% effective August 25.

Kitale branch

Coop Bank branch

But yesterday Cooperative Bank (Coop Bank) was the first to reduce its rates to 14.5% (the Central Bank Rate plus 4%). In a statement from the bank CEO, this new rate will apply for all new loans or credit facilities.  The modalities of the new law that was signed by the president this week, have not been outlined (such as if the rate is retroactive), but virtually all bank share prices have nose-dived over the last two days, with some banks pulling back on unsecured new credit facilities to customers.

Coop Bank is Kenya’s third largest bank, with a loan portfolio of Kshs 220 billion (~$2.18 billion).