Bank’s mobile phone loans drop since new interest rate took effect

The Kenya Commercial Bank (KCB) has not issued any loan on its mobile platform since the new law that caps interest rates came into force.

On its part, Equity Bank has introduced additional fees on top of the 14 per cent maximum interest rate that banks are allowed to charge, while the Commercial Bank of Africa (CBA) has warned that it may shut down M-Shwari if it is forced to lower its facility fee from the current 7.5 per cent to 1.2 per cent.

This shows that the banks are already feeling the impact of the new laws that were effected last week and have to devise ways around them.

But KCB says it had stopped giving loans due to a technical hitch.

“KCB M-Pesa is experiencing a technical hitch affecting loan requests, which we are working to restore. All other services are available on KCB M-Pesa,” said Edward Ndichu, KCB Head of Digital Financial Services and Mobile Payments.

Equity Bank has also reduced the number of loans it is processing on its mobile platform, even though it was the first bank to announce that it will be implementing the new laws.

In its updated terms and conditions on the one-month Eazzy Loan disbursed on the mobile phone, the lender says it will charge the interest rate as set out in the Banking Act, comprising the Central Bank Rate (CBR) plus a margin of four per cent.

Loan appraisal fee

“The CBR currently being 10 per cent per annum, the effective interest rate is thus 14 per cent per annum. This rate is subject to change as stipulated by law,” Equity says in the statement posted on its website.

But to get the mobile loan, customers will now have to part with a loan appraisal fee on fresh application of one per cent of the loan amount recoverable upfront. In case the loan is rolled over, it will attract another 1 per cent of the amount outstanding at the point of roll over.

Eazzy Loan customers will also have to bear a 10 per cent excise duty on the Loan Appraisal Fee recoverable upfront. This may push up the actual loan to over 16 per cent.

CBA, the market leader in the industry, said the costs of running the product, would make it shut down M-Shwari if forced to lend at the 1.2 per cent or less that the new law proposes. CBA currently processes over 70,000 loans on M-Shwari in what has seen it as one of the biggest cash cows for the lender. Majority of the loans are repaid within 30 days and the average loans taken are Sh3,000.

The bank, however, maintains that its product is shielded by the law since it does not operate an interest loan product, but a fee-based loan product.

“M-Shwari, as approved by the regulator, does not attract any interest rates on borrowing. What we levy is a 7.5 per cent facilitation fee. It is therefore not subject to the new provisions of the Kenya Banking Act in that respect. However, we will increase the interest we pay on M-Shwari deposits,” said CBA chief executive officer Isaac Awuondo.

Apart from the overheads in running the mobile products such as marketing, labour, processing and operations, banks have also invested in high tech software infrastructure to support the mobile products.

For instance, it takes less than five seconds to process a loan on M-Shwari, and this is due to the massive infrastructure at the back-end that works on an algorithm and a borrower’s risk profile calculated from various indices, among them the credit history.

CBA, which has more than 16 million customers, says it has put in over Sh2 billion investment in its product and a drastic cut would make it impossible to get a return on investment, given that it is not a term loan like other available products.

But KCB did not directly respond to whether at the current 1.2 per cent per month, it will be able to sustain its mobile business line.

“KCB remains committed to its digital finance strategy, with mobile banking as a key cog. The bank has also made deliberate investments in expanding its card, internet and agency banking to enhance its services. We believe that the future of financial services is in digital, which guarantees customers fast, reliable and secure access to finance,” Mr Ndichu said.

By August, KCB M-Pesa had advanced Sh10.3 billion. The KCB M-Pesa platform, which is the answer to CBA’s M-shwari product, was lending between Sh25 million and Sh30 million a day on the phone.

The lender says it has also signed up 6.4 million account-holders since it was launched two years ago.

Lower regulation

The account holders have Sh286.1 million saved on the platform. The savings and micro-credit platform is a joint initiative of Safaricom and KCB. Ndichu added that technology is helping build banking models that attract lower regulation and superior customer experiences.

“Services like KCB M-PESA are venturing into new models of scoring customers using alternative information never used before by any financial service provider,” he said.

The silence from the regulator on whether the mobile loans are subject to the new banking laws that came into effect on Thursday last week has left consumers to the interpretation of banks.

The Consumer Federation of Kenya has threatened to go to court on the matter, accusing CBA of just changing the name to suit their interests.