Category Archives: bank charges

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).

Capping Kenya Bank Interest Rates – Part III

Yesterday, the President signed the Banking (Amendment) Bill, 2015. It’s just under a year to the next election, and the president has surprised many by signing the bill.  He’s taken an ace from the opposition and, in a way, fulfilled his Jubilee party manifesto which has a line about “..pursue exchange rate stabilization policy and monetary policy that will lower interest rates.”

In signing the bill he noted that banks … need to do more to reduce the cost of credit and …we will implement the new law, noting the difficulties that it would present, which include credit becoming unavailable to some consumers and the possible emergence of unregulated informal and exploitative lending mechanisms.

There’s a version of the bill  at the ICPAK site that mentions:

  • The maximum interest rate is  4% (above the CBK base rate) for any credit facility in Kenya
  • Deposit on an interest earning account will be 70% of the base rate
  • Fines & jail terms for bank executives.
  • Banks that flout other sections of the banking law, can’t pay out dividends or bonuses and can lose control to the regulator.

There is still a lot of ambiguity in terms of the reach of the law. Does it cover mortgages? What about micro-finance institutions (MFI’s), mobile banking loan products (M-shwari has 4 million customers and KCB M-pesa has almost 1 million borrowers) , credit cards (which have interest rates of 30%) and most important will the law be retroactive? i.e. apply to already existing loans

In the meantime, expect banks to overhaul all their products including:

  • Limiting new loans.
  • Reducing interest-earning accounts i.e savings account products
  • Overhauling all products and marketing materials in terms of disclosures.
  • Bank charges will go up, and maintaining bank accounts will get much more expensive.

Finally, a common lament in this current parliament has been a lack of implementation of its bills. And with interest rates, the president may have signed it, but the date on which they will become effective as a law is not clear.

The era of bank super profits is in the  past, and this new bill makes the banking sector, still unsettled by bank closures and increased regulatory scrutiny, much less attractive to potential investors.

Capping Kenya Bank Interest Rates – Part II

Today Kenya bank CEO’s met with the Central bank governor. They again stated their opposition to the interest rate capping act from parliament in an innovative and free market country, and urged the urged the president to refer the bill back to parliament for more consultations. They noted that between 35%  to 44%  of new loans would be locked out due to their risk classification.

They also announced a raft of measures to assuage customer dissatisfaction with the banking sector including:

  • A commitment to reduce interest rates in line with the KBRR (The Kenya Banks’ Reference Rate which was reduced from 9.87% to 8.9%) on  July 25, 2016
  • Cancellation of account closing charges.
  • A commitment to set aside Kshs 30 billion to finance small & medium enterprises, of which Kshs 10 billion would go to women and youth-owned micro enterprises – at not more than 14.5%. The allocation of each bank will be tracked and reported on a quarterly basis from November.
  • A commitment to classify customers at credit reference bureaus as low, medium and high risk and align interest rates to match such borrowers.
  • Re-launching the cost of credit web site to include bank loan data enabling loan applicants to easily compare bank products
  • Promoting alternative dispute resolution.

These are all things banks should have been doing, but were not.  The statement also noted that the banks pay Kshs 69 billion per year in taxes (corporation, excise, PAYE) and that the new bill would reduce income to the government by at least Kshs 17 billion. But this is at a time when Safaricom alone paid Kshs 63 billion to the government as taxes and licence fees.

$1 = Ksh 101

Capping Kenya Bank Interest Rates in 2016

This week parliament passed a bill to cap interest rates for borrowers at Kenyan banks. The bill has not been published online (as of now), but members of parliament prayed that it would to be assented to by the President.

In their Wednesday debate to pass the bill, they lamented that previous bills had not been signed by presidents in the past.  Back in 2004, MP’s passed a similar bill, but which the President  refused to sign into law. because it contained a clause known as the “in duplum rule”.

Sunil ratesBefore that there was also a banking amendment from the government that was also not implemented. There were later amendments proposed by the government, some of which were implemented (CBK got a deputy governor, and to vet the suitability of bank owners, banks got to share information with credit reference bureaus), but others were not (ban on bank charges in savings accounts, the in duplum rule – again).

On news of the bill passing through parliament, both the Central Bank of Kenya (CBK) and the Kenya Bankers Association (KBA) expressed their opposition to the new bill. The Central Bank expressed concern on the adverse consequences of capping interest rates while the KBA supported some elements of the bill (such as disclosure of all loan charges) but not the capping on lending rates and determination on the minimum interest payable to depositors – as  the segment which will be most affected is Micro, Small and Medium-sized Enterprises (or MSMEs). Considering that MSMEs are Kenyan’s engine for growth, the Bill as proposed may curtail enterprise development, resulting in poor performance and unemployment. KBA

Some tweets have also highlighted the role of the government itself in raising the cost of borrowing for citizens. Banks are in business, and they take money from depositors, and lend it out to other people and also to the government (when they buy bills & bonds). In 2015, while Kenyan banks had total loans of about Kshs  2 trillion, they also held about Kshs 672 billion worth of government bills and bonds – meaning that about one out of every four shillings lent to the public was borrowed by the government. The government is a risk-free borrower, so for a bank to lend to anyone else, it has to be  premium above that, as there is a risk of default there.

On average, banks have about 40% of the deposits invested with government – and some banks with a ‘foreign outlook’ such as Bank of India, Habib AG, Habib Zurich, Citibank and Bank of Baroda in fact invest more of their depositors money with government, than they do as loans to customers.

$1 = Kshs 100