Competition pushing down cost of credit

Nairobi; Kenya: More Kenyans have begun streaming back to the banking halls, seeking for credit bargains, following a steady decline in interest rates charged by commercial banks on their products.

"It is worth noting that interest rates overall have been coming down in the last many years. Except for the spike that we saw in 2012, the rates have generally trended downwards," said NIC Bank Group Chief Executive John Gachora. "Between 2012 and today, average loan rates have dropped from more than 20 per cent to the current 15 per cent."

He made these remarks yesterday during a Kenya Bankers Association (KBA) CEO online chat session, themed, 'Market Competition and the Cost of Credit.' While most customers are still locked out of the formal banking sector, the situation is changing.

Kenya's banking industry is made up of more than 43 institutions. Analysts maintain that the oligopolistic competition - where a few players dominate the rest of the market is a fact that even bankers do not deny.

"It is a good observation about the top five banks that dominate the industry. But one must reflect; only a few years ago, we talked about only the top three banks," said Gachora. "The landscape has changed, we now talk about top six, and there is good reason to believe other competitors are closing in on these top six. He noted that this situation is not unique to Kenya, where the top four to five banks control the largest market share.

When the banking industry and Central Bank of Kenya introduced the Average Percentage Rate (APR) and Kenya Bank Reference Rate (KBBR) tools, expectations ran high that banks could lower their rate. "KBRR alone will not reduce interest rates because pricing depends on a number of factors, including macroeconomic environment, government borrowing, inflation, and customer credit risk," said Gachora.

He notes that the new APR regime creates transparency for all charges relating to one's loan - whether those charges are from the bank or from other third party service providers such as lawyers or and government offices.

He said going forward, customers will also be able to see all these hidden charges reflected in the annual percentage rate, which should be disclosed to the customer by the respective bank.

With banks offering more for deposits, savvy customers putting their cash in fixed deposits should consider this as a good investment option. A lot of this has been aided by the stiff competition among banks, micro-finance institutions and Saccos.