Opinion and Analysis
A banking hall. The different margins banks offer potential borrowers
reflect the risk for the perceived class of credit rating. PHOTO | FILE
By CAROL MUSYOKA
In Summary
- Mass market clients who borrow regularly and repay faithfully are interested in low debt costs.
Once upon a time, there lived a pig. Everyone told
the pig how ugly it was. The pig went on a diet and lost 10 kilos, but
everyone still saw it for what it was: a pig.
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It hired the sharpest professionals to undertake reams and
reams of research and spin scientific sounding data about how it was the
best animal alive, but everyone still saw it for what it was: a pig.
It finally walked into a shop and bought lipstick,
which it promptly smeared on its pouty lips. But everyone could only see
what it was: a pig. And so the pig lived unhappily ever after.
I have been writing this weekly opinion piece since
March 2009, which would make it slightly over five years of a punishing
weekly process of about five hours of staring into space wishing for a
topic to emerge out of thin air followed by three to four hours of
pounding furiously at my laptop to produce 1,000 sensible words.
I refrain from putting my credentials at the end of
these opinion pieces simply because I don’t think one or two sentences
can cover my (short) lifetime of experiences. But I feel for the sake of
some readers, I should explain my background.
Before I started writing I was, believe it or not, a
real life banker. In the 10 or so years that I worked in the industry I
played various roles but ended up as an executive director of not one
but two banks.
In the course of those roles I had direct
responsibility over what we called the profit and loss as well as the
balance sheet, meaning that I led teams that grew revenue (and,
therefore, profit or loss) from the skilful management of assets and
liabilities (on the balance sheet).
Pricing of those assets (or loans in regular-speak)
and liabilities (deposits) was determined by myself but with the strong
guidance of the assets and liabilities committee (ALCO) which is a
regulatory requirement for any financial institution licensed by the
Central Bank of Kenya.
One of the core objectives for ALCO in any bank is
to set the bank base rate as this is what will guide the pricing of all
retail and corporate loans. The ALCO also gives guidance on what pricing
on deposits should be based on the current cost of money in the market.
I have therefore made pricing decisions on loans
and deposits. I undertook this role with my sleeves rolled up and heels
tucked neatly under my table as I made money for my employer.
On the corporate side we had bespoke pricing for
the multinational and top tier local corporates, which meant that each
client had their own unique pricing based on their historical, current
and projected financial performance, quality of securities and past
borrowing history.
On the retail side, perhaps only the high net worth
individuals would have differentiated pricing again based on their
projected cash flows and quality of securities.
The rest of the watus were managed in bulk for many
reasons, one of them being primarily the cost of assessing past
borrowing history, monitoring and differentiating individual credits
would be herculean.
Not that it can’t be done, it’s just too much
administration in a market that is not used to differentiation on a
retail mass-market basis. And thus an unholy alliance formed within the
banking sector for the retail mass-market customer segment.
If the big Tier 1 banks that were the price-setters
were not willing to differentiate on price, then the Tier 2 and Tier 3
banks would happily play in the same space, after all, it was more money
for everyone.
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