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How Kenyan banks price their loans

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How Kenyan banks price their loans


Customers being served at Family Bank Tower branch in Nairobi. PHOTO | SALATON-NJAU | NMG

Since 2014, Kenyan banks have used the Annual Percentage Rate (APR) to show borrowers how much their loans will cost, including fees and interest.

However, it wasn’t always like this. Previously, lenders were regularly criticized for “hidden fees” on loans, which were in the fine print of contracts, disclosure of which was only accessible to those savvy enough to ask.

Borrowers can now access the full range of loan fees. But many of them still don’t take the time to review the terms of their loans, focusing only on the interest rate applied to the debt.

Banks are aware of this and therefore market their loans largely based on the top-line interest rate.

However, analysis of bank loans shows that third-party fees, charges and fees add significant costs, adding on average 6.4 percentage points to the average 13.5 percent interest rate charged by Tier 1 banks.

These additional fees and charges are payable to banks, third parties such as lawyers and appraisers, and the government through excise duties.

Bank Loan Application/Processing Fees

Internal dues include valuation/arrangement/negotiation fees depending on the bank.

Lenders charge application fees to cover loan processing administrative costs, which involve aspects of the borrower’s financial risk assessment. Banks usually deduct this fee from the loan amount, although some require the borrower to pay it up front.

These fees vary from lender to lender and are usually set as a percentage of the loan amount – and therefore can add significantly to the overall cost of borrowing.

Among the nine Tier 1 lenders, these internal bank charges for an unsecured loan facility vary from 2 percent (DTB) to 4 percent (I&M Bank), while the others charge between 2.5 percent and 3.0 percent.

In addition to the processing fees, some lenders like the credit union include a mobile notification fee.

credit life insurance

A mandatory third-party fee intended to cover the lender in the event a borrower is unable to service the facility due to death, loss of employment, disability, or terminal illness affecting the ability to service a loan.

Also known as credit protection, it is taken out by the borrower on behalf of the lender, paying a premium which the lender is compensated for, for example, in the event of the borrower’s death.

The average annual insurance fee for a Sh1 million unsecured loan with a Tier 1 lender is between 0.4 percent and 0.6 percent of the loan amount.

Attorney Fees

The lender will typically engage law firms to conduct due diligence on the collateral property to determine ownership and compliance with government levies such as ground interest and to ensure it is not encumbered with other loans.

The lawyers also take care of encumbering the property with the loan and releasing it when the payment is complete. Some lenders hire outside legal help to draft loan agreements, which increases the cost to the borrower. The borrower also pays the government fees for registering the security.

Valuation Fees and Stamp Duty

Borrowers who use land, vehicles or real estate as collateral for loans also incur costs related to the valuation of these securities when they take out the loan. These appraisal fees also apply to mortgage borrowers.

The banks need the assessments carried out in order not to fall short in covering the secured credit facilities.

Home loans are also subject to stamp duty, levied by the Kenya Revenue Authority (KRA) at 4.0 per cent of the property cost or open market value, and an additional 0.1 per cent of the loan amount if the property is encumbered for collateral purposes .

State Taxes

The fees that banks charge for the loan are also subject to excise duty, which is levied at 20 percent. For Tier One banks, where bank charges range from Sh20,000 to Sh40,000, excise duty ranges from Sh4,000 to Sh8,000 per loan application.

Professional attorney and appraisal fees are also subject to VAT, which is levied at the standard rate of 16 percent and borne by the borrower.

Richard Dement

The author Richard Dement