Category Archives: bank charges

Loan Interest Rates in 1997

Today, loan interest rates are capped at 14%, but what were they like twenty years ago? Here are excerpts from a  Weekly Review magazine issue from December 1997 a time of pre-election jitters, election financing, donor funding cutoffs, high inflation after Goldenberg, a depressed property market, and collapsing banks. This was after the move to streamline the sector through a universal banking law which led more financial institutions to convert into commercial banks, and later to merge.

Commercial bank base lending rates

24% 
Mashreq Bank
Habib Bank
25%
Development Bank
Kenya Commercial Bank
Equatorial Commercial Bank
Co-Op Merchant Bank
Credit Agricole Indosuez

26%
National Bank of Kenya
Fidelity Commercial Bank
Barclays Bank of Kenya
Investment & Mortgages Bank

27%
Consolidated Bank of Kenya
CFC Bank
Cooperative Bank
City Finance Bank
Habib A.G. Zurich
A.M. Bank
Chase Bank
Bank of Baroda
Habib African Bank
Standard Chartered Bank
Bank of India
First American Bank
Giro Bank

Interest rates, from a Weekly Review magazine, December 1997

28%
Citibank N.A.
Guardian Bank
Prudential Bank
Trust Bank
Paramount Bank
Commercial Bank of Africa
Stanbic Bank
ABN Amro Bank

29%
Universal Bank
African Banking Corporation
Biashara Bank
Prime Bank
Akiba Bank
Middle East Bank
Victoria Bank

30%
Transnational Bank
Imperial Bank
Bullion Bank
First National Fin. Bank
Daima Bank
Guilders Bank
National Industrial Credit Bank
Reliance Bank
Ari Bank Corporation
Credit Bank
Southern Credit Bank
Diamond Trust Bank
Delphis Bank
Fina Bank
Commerce Bank

Citi’s outlook on Kenya Banking

Citi Bank has been producing some insightful research reports on companies they watch like KCB, Equity and Safaricom for their investment clients.  The latest one (Will it stay or will it go? — Awaiting clarity on the Banking Act) is an outlook on Kenya banking, based on the financial results that all banks released for the third quarter of 2017 which is exactly a year after Kenya’s Parliament passed a law, which the President then signed, that capped all Kenya banking loan rates at a maximum of 14% per year.

Citi’s findings:

  • Despite the Banking Act of 2016, Kenya’s leading banks maintain among the highest margins (8~9% NIMs) and returns (ROTE 20~23%) of any frontier market, coupled with strong capitalization, a stable currency and an improving political environment.
  • While there is little clarity on the future of the Banking Act, we acknowledge that many investors are interested in that “what if?” case if the legislation was to be amended, and hence provide a sensitivity analysis to gauge the upside from changes to the regulatory regime.
  • The Kenya banking sector is fairly concentrated with the top 5 banks controlling just under half of the assets (48%), KCB is the largest bank with a 14% market share, followed by Equity Bank and Cooperative bank with 10% each. A similar story for deposits, with the top 5 banks accounting for 50% of the market, KCB is the largest player with a 15% share, followed by Equity Bank at 11% and Cooperative bank at 10%.

The Citi report notes that KCB who grew loans by 9% in the third quarter despite the interest rate cap has a diverse client base that makes it easier for the bank to navigate the challenging environment. KCB has expressed interested in acquiring smaller banks like National Bank, as it also it pulled back from volatile South Sudan in May 2017, where it only retains a license.

Equity has put brakes on lending, with flat loans growth in the third quarter. The bank’s Equitel is now Kenya’s second largest mobile money platform after Safaricom’s M-Pesa, with 4% of customers and 23% value of transactions. Equitel appeals to customers as it has no internal charges. Meanwhile, mobile loan growth fell in the half year at Equity as the bank tightened lending standards, while KCB’s grew. Still, Equity disbursed 1.6 million mobile loans through Equitel in the first half of 2017.

The Citi report also notes that KCB lags Equity in the digital push, with mobile phones accounting for 70% of transactions at Equity and  57% at KCB. Elsewhere, 86% of all customer transactions at Co-op Bank are done on alternative delivery channels mainly mobile banking, ATMs, internet and agency outlets. Another finding was that the large banks have benefitted from the flight to safety by depositors following the collapse of three smaller banks in 2015-16.

The Citi Report looked at the Kenya banking interest rate caps under three scenarios with the first  being that the caps are extended even further to bank charges. The report mentions that the Kenya banking regulator, the Central Bank (CBK), had rejected 13 out of 16 commercial bank applications to increase charges, all pointing to tough times for banks in a slow loan growth environment. The second scenario was that the interest rate cap remains as is, and the third scenarios was that the caps are loosened by excluding some loan segments which will allow banks to lend at higher rates to riskier segments like SME’s, retail and micro-finance clients. However, Citi finds that the interest rate caps are not going away soon, and they are here to stay, probably for a few years. 

Finally, the Citi report (published on 19 November), rates KCB as a ‘buy’ with a target share price of Kshs 47 (current price on December 8 is Kshs 43), while they are neutral about Equity Bank which they value at Kshs 38.5 per share (current price is Kshs 41) as they think it is fairly valued.

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