Skip to main content

Why can't Kenyan banks voluntary lower their lending rates?


 


In one of those episodes where history is doomed to repeat itself, September 2016 saw Kenya implement interest rate caps, which had been done away with in 1991.

Many Kenyans rejoiced, mistakenly thinking that it would result in easy and affordable loans. The result, however, was a distorted market. It is safe to claim that most Kenyans have never borrowed from a bank. Cheaper loans weren’t going to see them rushing to borrow from banks.

Capped interest rates also saw banks become more careful with whom they lend to. Many small businesses will naturally fail - business is hard, for those who have attempted their hands at one. It therefore makes no sense for a bank to lend to many of these businesses - you simply won’t get your money back.

The other thing with this country is that it’s very hard to tell who will repay a loan and who will not. Those who have lent to their friends and family can attest to this. There are also fewer ways to make those who have borrowed repay loans. Given bank loans are rare, threatening to blacklist them may not be enough of a threat - it may, however, work for microloans such as mobile loans. Hence why banks require collateral such as land which can easily be sold to recoup loans.

So far, we have not answered the question why banks in Kenya charge high rates for loans they issue. Are they malicious? Do they simply hate Kenyans?

First things first, we need to determine if rates in Kenya are high. Looking at 2015 lending rates for a a number of countries, we see that Kenya had 16%, Afghanistan 15%, the United States 3.26% and Brazil 43.9%.

Ignoring the rest, why does Kenya not have as low lending rates as the US? To answer the question, we work backwards by looking at how the top banks in both countries make their money.

JP Morgan Chase is one of the largest banks, not only in the US, but in the world. Looking at their 2015 revenue, 47% comes from charging interest, while 17% of their revenue comes from asset management and 11% from principal transactions.

In case you are wondering what the last two are, this blog here has a good explanation of this breakdown, and how that bank in general makes money http://www.stemtobusiness.com/jpmorgan-chase-make-money/

Looking at the Bank of America, another large bank in the US, their 2013 rev66%enues shows 48% of their revenues came from levying interest, 14% from investment and brokerage services and 8% from service transactions(charges for banking services eg ATM withdrawal, over the counter services, monthly ledger fees etc). Here’s the breakdown http://marketrealist.com/2015/01/bank-america-make-money/
Now, let’s look at Kenya’s largest banks.

In 2015, before the interest rate caps, 66.4% of KCB’s revenue came from interest income and 22.2% from different fees and commissions. Over at Equity Bank, 60.7% of their 2015 income was from levying interest.

This tells us that banks in Kenya are more dependent on interest rates (and banking fees) for almost all of their revenue. To get them to US levels, we would have to drop the interest rate contribution by 20%, not an easy margin.



Revenues by source of select banks in Kenya and the United States. Data from 2013 and 2015

How then, do we get them to cut their interest rates?

Looking at US banks, we would have to introduce other sources of incomes for banks, and vastly increase the amount loans being taken. Both, however, are dependent on the size and complexity of Kenya’s economy.

To make KSh. 30 billion in revenue from 30 million loans, the average net interest from each loan would be KSh. 1,000. Reduce the number of loans to just 1 million and I have to earn net interest of KSh. 30,000 for each loan to make the same amount of money, hence charge a higher percentage of interest per loan.

Therefore, the simplest way to bring down rates would be to increase the amount of loans being processed across the banking industry - to drive competition and hence lower rates.

But money to be lend has to come from somewhere - there would need to be a source of large deposits which aren’t been spent on much else, which is not the case in Kenya, though may be the case in wealthy countries.

To also increase the amount of loans processed, people have to be borrowing the money to use it in some place where they either expect to make it back, or to spend on so called conspicuous consumption. Credit cards are one such way, where people borrow against future income - credit card rates though tend to be high even in established economies. In the US, these are 12% - 14% which jump to 27% - 30% if you make your payments late.

The other alternative is if banks could magically find a way to determine who are most likely to repay their loans and who are not. The field of credit scoring, however, relies on information and recently, on analytical methods.

If a business has been existence for 1 year and not 50 years, a computer program may analyse what we know about it to determine the likelihood of that business repaying a loan. An easier model is asking for the person applying for a personal loan to share information about where they went to school, where they live, their Facebook friends, their hobbies, their contact list and more :-). We then analyse the data to profile the person and compare with the profiles of other people we have lend to. Were they good borrowers hence of a lower risk?

This may sound strange and scary, but there are no easy pills to swallow for lower interest rates.

And by the way, if you are a Brazilian, you can comfortably borrow at 73%. Here are some of the rates around the world. http://www.tradingeconomics.com/united-states/bank-lending-rate

Comments

Popular posts from this blog

Nairobi's Top 4 Texas Brisket Places Reviewed and Ranked

Brisket on a bed of roast vegetables with barbecue sauce at Texas Brisket, Kikuyu  This review has been updated after a number of you suggested I try the brisket at County2County.  What's the best place to have Brisket in Nairobi? What's even brisket?  Brisket is one of the toughest cuts in a cow, from around the belly. It is so tough that it has to be smoked for about 16 hours to tenderise. But that there, is the catch.  12 to 16 hours later, it is the most flavourful and softest cut you will ever have. So full of flavour and so soft you can pick it apart with your fingers.  However, due to the long cooking time involved, only a few places offer brisket in Nairobi.  The best so far is Texas Brisket which is located within Kikuyu Railway station.  They do the meat for a proper 16 hours, and will usually have a fatty or non-fatty portion. The fatty portions are more tasty. A 500 gram serving goes for KSh. 900 and a 1 KG order comes with a serving of free fries. Their brisket has

A to Z of Girl Pick-up Lines

Girl,  You are like a breath of fresh air , like an outstanding piece of Art in an art gallery  There are many things you and me can be, but it puts a smile of satisfaction on my face and a smile of envy on my buddies faces that you both beautiful and bootyfull  E ither your creator must have taken the greatest care creating you or your cheated your way around heaven, 'coz you clearly the prettiest girl on earth  D on't ask why my breathing quickens every time I see you; setting my eyes on you makes me feel like I am drowning in your beauty, I have to catch my breath   Exciting, Exotic, Elegant, Electrifying ; so many definitions in english , but when it comes to the human race, girl, you are the one and only definition of all the above  W hen I say you are fly , it may be due to the sensation of flying off the ground that I get when I am around you. Some girls are beautiful, a few are decent, even fewer got class; I didn't know I could find all this qualities in one gir

Kenyan products: The art of punishing your consumer

This post was written in 2011. Facts may have and indeed have changed - but the conclusion has not.  Dormans instant coffee tastes better than Sasini instant coffee. Ramtons electronics are manufactured for Kenya's Hypermart Limited, yet maintain a high product quality Peanut butter used to taste so good, but you could not afford it on the pocket money that you got back in school. A few years later, you have your first real job and your first "disposable" income. You buy your first real tub of peanut butter, probably the first in your life. You feel proud that Dominion peanut butter is manufactured in Ruiru, a town that you visited in your campus days to withdraw your pocket money, it was the nearest bank ATM to your campus.  This was before Equity bank became a mainstream bank and decided to open an ATM in your campus, and before M-Pesa meant that you

Beers in Kenya: A sober opinion

Note: This is a dated post and has since been mostly passed by events. SAB Miller beers including Castle and Peroni are no longer widely available in Kenya after their exist. Sirville Brewery was bought out by Brew Bistro before being permanently shut in a tax dispute. Kenya is a land of milk, honey, beaches and taxes. I have penned, or is typed, a newer post here .  Peroni - One of the best beers in Kenya. Did a taste of canned and bottled Italian, and bottled Tanzanian I like the tangy flavour and body in Tanzanian Peroni. The can is close. Heineken drinkers will like the Italian one.  I have had a short beer swigging stint in my life. It has however been long enough for me to share my opinion of Kenyan beer. Interestingly, over the course of sharing such opinions with other drunkards connoisseurs,  I have found that we all have different views as to what beer is the best, which one makes you too drunk, or which one gives one free, extra hangover for every hangover you get

Lusaka and Livingstone Zambia to Namibia By Road

Zambia is a pretty large country,  an exciting one and with no shortage of potholes.  For instance, take the direct route from Lusaka - Livingstone to Namibia through the Sesheke - Katima Mulilo border crossing. Typically, roads are either good or tend to have potholes here and there. However, the last 120 kilometres of the Livingstone to Sesheke/Katima Mulilo route are best described as potholes dotted by some road here and there for the just thirty kilometres past Kazungula town, which is also the Zambia - Botswana border crossing.  Trying to drive to Sesheke is so bad it will take you anywhere between 4 hours to 6 hours to navigate those 100 kilometres. You may or may not have your dignity at the end and your vehicle may be in more than one piece.  If you really must use the Sesheke - Katima Mulilo crossing as of December 2022, then take the 900 kilometre longer detour from Lusaka to Mongu then back to Katima Mulilo. It doesn't guarantee you absence of potholes, but at least the