- An Absa customer taking out a one year unsecured personal loan of Sh1 million today will have a total borrowing cost of Sh71,807.
- Absa’s main competitors, including DTB and Equity Bank, are now pricing a similar loan from Sh95,807 to Sh114,057.
- Almost all banks have an interest rate of 13 percent or slightly below, with variations in the total cost of credit mainly due to differences in other discretionary fees.
Absa Bank Kenya #ticker:ABSA has joined small lenders to offer the cheapest personal loans, breaking with other big banks that have continued to provide relatively expensive lending facilities.
An Absa customer taking out a one year unsecured personal loan of Sh1 million today will have a total borrowing cost of Sh71,807.
This corresponds to the financing costs incurred by First Community Bank (FCB) and Housing Finance (HF) for a loan facility of similar size and duration. The Bank of Baroda is the cheapest at Sh70,794.
Absa’s main competitors, including DTB and Equity Bank #ticker:EQTY, are now pricing a similar loan from Sh95,807 to Sh114,057. Absa was previously one of the most expensive lenders.
Almost all banks have an interest rate of 13 percent or slightly below, with variations in the total cost of credit mainly due to differences in other discretionary fees.
Borrowing cost estimates come from the Borrowing Costs website developed by the Kenya Bankers Association (KBA) which aims to improve transparency in the formal lending market.
The KBA says the estimates are a starting point for a potential borrower interested in taking out a loan, adding that contacting a bank directly will get official loan prices.
Absa’s charge of Sh71,807 for the Sh1 million one year unsecured personal loan equates to interest-only payments of 13 per cent over the life of the loan.
The credit facility is repaid monthly with interest being calculated on a declining balance.
Equity Bank also charges an interest rate of 13 per cent or Sh71,807 but has a higher total borrowing cost of Sh114,057 for a similar credit facility. This is due to additional fees of Sh42,250 including loan application fees.
According to the KBA, banks can also charge fees for other parties, including lawyers, insurers and the Kenyan tax authorities.
However, banks that only charge interest do not charge any internal or third-party fees.
Other major banks with higher overall credit costs due to internal and external fees are DTB and I&M Bank #ticker:IMH , which charge Sh95,807 and Sh100,160 respectively for a similar credit facility.
NCBA #Ticker:NCBA calculates a total of 104,807 Sh, KCB #Ticker:KCB (107,207 Sh), Co-op Bank #Ticker:COOP (111,929 Sh) and Standard Chartered Bank Kenya #Ticker:SCBK (112.00 Sh 745).
Price trends show that most major banks price their loans almost the same, indicating minimal competition.
Their enormous lending capacity also means they are indifferent to the more favorable lending terms offered by the small institutions.
Assuming more customers flock to the cheap little banks, they won’t get the credit they need. The Bank of Baroda, which currently offers the cheapest loans, had lent Sh51.9 billion as of September 2021.
Equity Bank Kenya, meanwhile, lent Shillings 367.5 million over the same period, with the big banks generally dominating in terms of lending capacity and other metrics, including customer numbers.
Customers were found to have high levels of loyalty to their banks, suggesting that the majority are not looking for better deals and are more interested in easy access to credit.
The current customer satisfaction survey by KBA shows that almost eight out of ten respondents stated that they would recommend their banking service provider.
“Finally, the customers were asked to indicate whether they would recommend their respective bank to other customers. This question aimed to determine customer satisfaction with a bank’s services,” says the association in a survey published last week.
“It also measures a customer’s willingness to recommend said bank’s services to those closest to them – friends and family. Based on the results, it was found that nearly eight in ten (77.6 percent) of respondents answered yes — indicating their willingness to recommend their service providers to others.”
For most banks, the fees they add to interest charges are one of the means to protect their margins as the industry remains subject to a de facto tax regime on lending rates.
The interest rate caps were removed after three years on November 7, 2019, allowing banks to increase borrowing costs for customers with a higher risk of default.
But the Central Bank of Kenya (CBK) intervened administratively, requiring lenders to come up with new loan pricing formulas that govern their interest rate changes.
To date, most banks have not received approval for their risk-based lending proposals, even after several discussions with the regulator.
Part of the discussion is an explanation of factors that drive the pricing of credit, such as cost of financing, return on assets, operating expenses and risk premium.
The CBK, which warned banks in 2019 against resorting to penalty rates higher than 20 percent in the post-rate cap regime, wants every lender to justify the margins they plug into their formulas.
The regulator appears concerned that lending rates are rising to the high levels predating the cap years that prompted the imposition of interest rate controls.
During the freewheeling years, most banks charged interest rates in excess of 15 percent, and the most aggressive approached 30 percent.
The standoff observed in the proposed risk-based lending system has left the average lending rate in the industry stuck at an average of 12.16 percent in December, according to CBK statistics.
This is lower than the interest rate available on some government debt, which has no credit risk, unlike households and businesses, which can default one in ten times.
The most recent infrastructure bond, for example, had a fixed interest rate of 12.96 percent and was oversubscribed by banks and other investors.
However, adding fees to interest or ordinary lending allows banks to match or exceed yields on medium- to long-term government debt.
A one year unsecured personal loan of Sh1 million at 13 per cent interest plus fees of Sh42,250 results in a total loan cost of Sh114,057 or an Annual Percentage Rate (APR) of 21 per cent.
This means that shorter-term loans are more profitable for banks because the fees can be charged each time a customer draws a new loan facility.
With long-term loans, the fees only appear once and therefore reduce the frequency of reusing the fees.
Most retail loans, including those offered through mobile banking platforms, have terms of one to three months, with some extending to one year.
There is no cap on the fees that lenders attach to loans, so institutions can adjust them to their needs to increase margins or attract more customers.
According to KBA, APR, driven by discretionary fees, is the most relevant metric for comparing borrowing costs.
“There are various costs associated with a loan. These costs are in addition to the interest component and range from bank charges and fees to third-party costs such as legal fees, insurance and government levies,” according to the association.
“Because loan applicants typically focus only on the interest rate when making their lending decisions, banks have proactively adopted the annual percentage rate of charge or annual percentage rate of charge model, which converts all of the direct costs associated with the loan (also known as total borrowing costs) into one number.”
The APR allows borrowers to comprehensively compare different lending products based on the total cost of the facility, enabling them to make more informed lending decisions, KBA added.
Small banks, which tend to be the cheapest, use their cheap credit rates as one of their key competitive advantages to attract customers, as they lack the advantages of large banks, including a large customer base, broader distribution network, and larger marketing budget.
While Absa is a big bank by financial standards, its customer base tends to be that of small institutions rather than large lenders, and its move to offer cheaper credit could be a strategy to increase its market share.
Absa had 250,000 credit accounts as of December 2020, while those of Bank of Baroda, FCB and HF were less than 12,000 each, according to the latest CBK banking supervision report.
NCBA Bank Kenya had the most credit accounts at 7.3 million, although most of these are microcredit accounts offered through its mobile banking services.
KCB was second with 1.8 million loan accounts, followed by Co-op Bank (800,000) and Equity (700,000).
For retail customers, easy access to credit is valued higher than the cost of credit facilities. This is evidenced by the rising popularity of alternative lenders, including mobile and digital platforms, who are charging far more exorbitant interest rates on their short-term loans.
Some of the platforms charge annualized interest rates in excess of 300 percent, with players saying they need a higher risk premium because the loans have no collateral and higher default rates.