Banks defy new loan pricing tool to rake in Sh141bn

Money Markets

Kenya Bankers Association CEO Habil Olaka (left) and chairman Joshua Oigara during a past media briefing. PHOTO | FILE 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• Central Bank says in its latest report that the lenders braved new measures to lower the cost of money to make a total of Sh141 billion up from the Sh124 billion they made the previous year.   
• This new level of profitability is expected to renew public debate over the cost of borrowing in Kenya, which critics maintain allows banks to grow at the expense of other sectors of the economy.
• Most banks are currently offering business loans at between 16 per cent and 21 per cent with asset-backed loans as the cheapest. Personal loans are charged between 17 per cent and 22 per cent.

High interest rates and growth in lending helped Kenyan banks to increase their profits by Sh18 billion, the latest industry statistics show.

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Financial sector regulator the Central Bank of Kenya (CBK) says in its latest report that the lenders braved new measures to lower the cost of money to make a total of Sh141 billion up from the Sh124 billion they made the previous year.   

The super profits came on the back of a 22.8 per cent expansion of the loan book to Sh1.97 trillion— the fastest growth in the past four years.

Analysts attribute the new level of profitability to the relative stability of interest rates that have defied recent measures to give borrowers some relief in the form of smaller lending margins.

“This is largely attributable to stability of interest rates despite last year’s introduction of the Kenya Banks’ Reference Rate (KBRR),” said Florence Kimaiyo of Genghis Capital.

This new level of profitability is expected to renew public debate over the cost of borrowing in Kenya, which critics maintain allows banks to grow at the expense of other sectors of the economy.

Banks have particularly been criticised for being slow in transferring the benefits of an improved economic environment to investors through lower lending rates, choosing instead to protect their profits.

READ: Banks Q3 profits match last year’s full-year earnings

The CBK last June introduced the KBRR to help increase transparency in the pricing of loans — a move that was expected to bring down interest margins in the loans market that stand among the highest globally.

The CBK data shows that the lenders’ interest income rose 16.3 per cent to Sh245.7 billion in December up from Sh211 billion a year earlier.

Most banks are currently offering business loans at between 16 per cent and 21 per cent with asset-backed loans as the cheapest. Personal loans are charged between 17 per cent and 22 per cent.

Businesses have the option of passing the high financing costs to the ultimate consumers of their products or services unlike individual borrowers who have to absorb the full cost of credit.

The tight corner into which individual borrowers have been driven is seen as the main driver of the wave of agitation for salary increments, especially in the public service.

The introduction of the KBRR was expected to shed light on the complex matter of interest rate computation and increase competitive pressure among the lenders that would lead to lower lending rates.

Credit officers in the banks, however, told the Business Daily that they had closed the year under review with the pre-KBRR interest rates having marked the difference with the base rate as their premiums

Lower interest rates are seen to be necessary for Kenya to realise the desired double digit economic growth that the ruling Jubilee Coalition has promised Kenyans.

The persistence of high interest rates also flies in the face of the promise of some relief at the bank by President Uhuru Kenyatta’s government following last September’s successful issuing of the sovereign bond.

Borrowing from international markets was expected to ease competition for funds in the local markets resulting in lower interest rates but that has yet to materialise.

READ: Banks tap thirst for big loans to grow their profits

Ms Kimaiyo also pointed at the continued growth of transaction income for banks with the increase in alternative channels of doing business such as mobile, Internet and agency banking.

The lenders’ non-interest income rose 15 per cent to Sh169.3 billion while customer deposits grew 17.7 per cent to Sh2.3 trillion in December 2014 from Sh1.98 trillion a year earlier.

Ashif Kassam, the managing partner of audit RSM Ashvir, said the faster growth in lending compared to deposits indicated the banks were investing in higher yielding business of lending to the private sector and not in Treasury bills and bonds.

Commercial loans are charged at a higher rate owing to perceived higher risk than government debt.

The banks are expected to individually release their results beginning this month but overall industry performance gives a preview of what to expect.

The latest super profits cement the financial services sector’s position as not only the most profitable but also the most resilient, having weathered Kenya’s 2014 security challenges and its impact on the tourism sector.

That outcome is confirmed by the huge investor interest in banking stocks at the Nairobi Securities Exchange.

Mr Kassam, however, maintained that the lenders must keep a close watch on tourism and the real estate sector this year citing the increasing surplus in the latter that comes with the risk of defaults arising from slow sales.

“A lot of banks will have to restructure their loans to avoid reporting bad loans,” said Mr Kassam.

The Treasury has said it intends to make it mandatory for banks to disclose details of loans that they restructure every month in an effort to monitor risk exposure in the financial sector.

The recommendation, in the budget policy paper, is among others meant to ensure the stability of the financial services industry, including the conduct of a risk analysis in the mortgage market by end of April.

Commercial banks have also been forced to increase their capital holdings to build a buffer against economic shocks.

The CBK data shows that shareholder funds increased by 22.8 per cent to Sh530 billion from Sh431.5 billion in December 2013. The banks have in the past cited the high capital investments to justify the huge profit levels.

An increase in non-performing loans was the only blot on the banks’ sterling performance.

The CBK report shows that the volume of loans not serviced for a period exceeding three months grew to Sh108 billion by the close of November last year.

The factors contributing to the rise in defaults included security concerns in the tourism sector, feuds between the Ministry of Lands and the National Land Commission, which stalled real estate projects, uncertainties in the on-going reforms in the Mining sector and slow payments by government to its contractors.