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

Beers in Kenya: A sober opinion

I have had a short beer swigging stint in my life. It has however been long enough for me to share my opinions 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 a free,  extra hangover for every hangover you get from it.

For starters, like everyone else, I discovered that beer isn’t as sweet as it looks like in those adverts that show golden barley swaying in breezes,  happy men smiling and toasting chilled, foaming glasses of beer as a deep voice does some narration in the background.

Beer is bitter! Now, it turns out beer is intentionally made bitter. See,  beer shares the same ingredients as bread. The major difference is that bread isn't fermented. Bread is sweet, so why isn't beer sweet?

The bitter story of the downfall of Mumias Sugar company

Have you heard the bitter story of Mumias Sugar?

Regarded by many as Kenya's most successful sugar miller, Mumias Sugar Company was a disaster waiting to happen.

Many pointed out how Mumias Sugar Company was a fortress in the wreck that is Kenya's sugar industry, only unaware that it was just a matter of time. As the old wise men said, "Ukiona cha mwenzako cha nyolewa, tia chako maji".

The proverb means that if you see your neighbour's head getting shaved, your head will soon be undergoing the same - you'd therefore better wet your head for a smoother shave, otherwise you will be forced to undergo a painful, dry, shave.

But what ails Kenya's sugar industry?

The Kenya sugar industry is under legal siege. The typical Kenyan issue of coming up with laws to tackle a problem is evident here.

Many of Kenya's sugar factories are owned by the government, and have slowly declined under mismanagement and corruption. The appointing of political cronies and trib…

Kenyan products: The art of punishing your consumer

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 could withdraw your pocket money next to the kibanda  where you had your one meal of the day.

The peanut butter though is a far cry form the peanut butter you remember. It does not taste that good, and turns into some sort of stone barely before you are a third way through the jar. The stone is not a kind that you learned about in your Geography classes though.

Dejectedly, you decide not …

How much Nairobi Residents Pay in Rent

In my last post, I explained how difficult for people looking for housing in Nairobi. The main challenge is lack of information. On this front, I began a project that will collect some information, which will provide some start for those looking for housing in different areas in the city.

In the last one month, 33 people have given their responses.




Interesting enough, majority of the respondents, 16 to be exact, live in 2 bedrooms. This may mean that either 2 bedrooms are the most popular rentals in the city, or the most available. Only one way to find out - if you live in a 2 bedroom rental, here’s another survey.

10 of those who filled in the survey live in self contained 1 bedrooms.

5 people have 3 bedrooms, including 2 in Kikuyu, 1 in Ngong and Lower Kabete each, and another around Langata/National Park.

1 respondent has a 4 bedroom, while another one has a self contained bedsitter.
Pricing




Turning to pricing, the price of 1 bedrooms ranges from Kshs. 10,000 in Rongai to Kshs…

A Kenyan in Addis Ababa (Part 2) - The "University Girls"

This post continues from Part 1. 

The residents of Addis are friendly too. On my first day, I did meet a guard at a hotel, who later offered to show me around. Among the places he suggested, was this place where some “University girls” were holding some "dancing ceremony". He added, that Ethiopians being Orthodox Christians, were about to go on a sex, alcohol and meat fast, hence the importance of this “ceremony.”
I had some suspicion that I was being sold to sex, but my guide insisted that this was not a sex sale. Just dancing University girls. We did end up in some nondescript compound, and into a house. There was sort of a sitting area, with a radio system, low benches and tables, and grass sprinkled around the floor. Grass sprinkled around the floor is an Ethiopian tradition that indicates you are welcome to a place.

It was about 5 PM,  and the hosts seemed not to be expecting any visitors at this time. My guide disappeared down some corridor into the back to call them. In…