Large banks squeeze more profits out of customers than small lenders

CBK governor Njuguna Ndung’u. The regulator is in talks with bank CEOs over the high interest rates. FILE 

By GEORGE NGIGI,

In Summary

• Central Bank says the six banks are paying lower interest to clients

Kenya’s six largest banks are squeezing their customers most for profit by charging the highest cost of loans and paying the least return on deposits.

A new Central Bank of Kenya (CBK) survey shows that the large banks are charging borrowers up to 2.45 percentage points more by taking advantage of their expansive branch network and brand recognition to price their loans higher than their smaller competitors and paying lowest interest to those who save with them.

CBK classifies KCB, Equity, Standard Chartered, Barclays, Co-operative and CFC Stanbic as large banks based on their asset size, capital, deposits and market share.

“Small banks had the lowest average spread at 9.55 per cent, followed by medium sized banks at 9.57 per cent, and large banks at 12 per cent,” read the latest biannual monetary policy report released by the industry regulator.

The spread is a measure of the difference between average cost of lending and the rate of return paid on deposits. There are 15 medium sized banks as per the CBK classification and 22 small ones.

The medium sized and small banks have to offer higher deposit rates than their large rivals to attract savers as they are perceived to be risky based on past Kenyan banking history that has seen over 19 banks collapse.

“Customers seem to be motivated more by finding a safe parking place for their savings than by earning a high return,” said the World Bank in a recent report on Kenya’s banking sector.

The tide, however, appears to be turning with the nine months’ financial results released by banks showing the large lenders lost out to their competitors in deposit mobilisation and profit growth.

Customer deposits held by the large banks fell below half the industry total for the first time in over five years, according to data up to end of September 2013. The large banks enjoyed 61.5 per cent of the industry profits as at the third quarter down from 64.4 per cent a year earlier.

CBK data shows that the profit margin enjoyed by the big banks dropped by three percentage points between April and October last year, while other banks dropped by less than a percentage point; leading to the faster profit growth by small and medium sized lenders

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READ: CBK puts big banks on the spot over high interest rates

Research by World Bank showed that the largest proportion of the interest margin was being directly pocketed by the lenders as profit. The research shows 48 per cent of the interest spreads is attributable to profits with operating expenses taking 40 per cent.

Interest spreads have been a concern in the country with banks being accused of overpricing their loans to rake huge profits at the expense of other sectors of the economy.

Deputy President William Ruto recently took up the issue, terming the wide spreads in the country as unexplainable given that the interest margins were one digit in other comparable economies such as Nigeria and India.

The banking industry reported Sh107 billion in profit in 2012 despite an economic slowdown occasioned by high interest rates and a general rise in price of goods and services.