Why are bank interest rates so high in Kenya?

Analysts argue that incensing more banks could lower the interest rates the same way more matatus on given routes stabilise fares. [GRAPH: XN IRAKI]

Kibaki’s reign, particularly the first five years, were characterised by falling interest rates and availability of credit. Banks set up kiosks on the streets to dole loans. It is joked that is why hawkers were chased off the streets. Banks employed teams of sales representatives - mostly young graduates to sell loans. I met one such a sales representative last week.

The interest rates are still high compared with Kibaki’s first five years. The Government has even formed a task force to investigate the causes of high interest rates. Why are rates high? What can we do about them? Economists will quote the law of supply and demand to explain the high interest rates.

Since the demand for loans far outstrips the supply, the interest rates should go up to ration out the available funds. If this law is at play, why hawking of loans? Hawking of loans could indicate that Kenyans are reluctant to take loans-probably because of high rates. An interesting explanation is that Kenyans are too loyal to their banks. Rarely do we switch banks, even after complaining of poor service. We also rarely switch from one mobile phone service provider even when given free service. Without ever switching banks, we never know there are better deals.


Banks can also charge you a loyalty premium because they know you cannot “window shop” for cheaper loans. I noted this when I went buying groceries on traditional market days in Wangige and Ruiru; I paid more if I stuck to one seller! When buying goods or services, trying out can get you very good deals.

The suggestion that bank rates be published is a great idea. However, things often change when you are on the verge of getting a loan. One bank asked me for my CV when looking for mortgage. Government competes with us to get bank loans through government papers like bonds, Treasury bills and notes. When government sells such papers, it “withdraws” money from circulation to reduce inflation.

Do you recall the aftermath of Goldenberg when rates hit 70 per cent as the Government tried to mop up excess liquidity (money in circulation)? But it pays interest rates on that money which though not very high, attracts lots of banks because the government is very secure compared with me or you - it always pay. Government appetite for money from banks, which goes up if there is a budget deficit increases demand for money and ups the interest rates.

How about reducing the cash ratio-the percentage of money banks keep with Central Bank so that more money is available to loan out? Despite M-Pesa, about 98 per cent of our financial transactions are through cash. This raises the cost of banking and customers pay that cost through high interest rates.

If we used cards, banking would be cheaper and we could benefit in the long run. One reason Toyota cars are cheap is because the firm has lowered costs of production using Kaizen, Just -in-time production systems and other innovations. With all the Saccos , microfinance institutions and even chamas, the financial sector is not competitive enough.


Licensing more banks could lower the interest rates the same way more matatus on given routes stabilise fares. A good example is Nakuru-Nairobi route. The new banks could lower their interest rates to attract us and more established banks could follow suite. The evidence that there are too few banks is there for all to see-super profits and thriving shylocks.

It has been argued that bank ownership structure in Kenya has a bearing on interest rates. Who owns Kenyan banks? If the bank owners are cosy with regulators and the Government, they could act in self-interest rather than public interest. It would be interesting to know who owns the 44 or so banks in Kenya. Bank ownership could be the reason why attempts to control interest rates through legislation is unlikely to go far.

Interests are kept high by the risk premium myths. Lenders argue Kenya is a risky market. They cite default rates, politics and inconsistent policies. That risk is often a myth that leads to same bank charging very different interest rates to customers in say UK and Kenya.

That perception needs a change. Foreigners who visit Kenya are often surprised that what the popular media and hearsay portray and what is on the ground are different. I found that when I visited Mombasa recently. Dishonesty also keeps interest rates high. If were more honest, we could lower interests by getting money from each other and avoiding banks, which would lower the interest rates to attract us. However, we are not good in paying debts. Debtors tell the sweetest lies...

We are not good savers, which reduces the amount of credit available. Banks lend what they get from us, the reason they are called financial intermediaries. Finally, if were more innovative we could lower the interests further. Agency banking will lower the costs of banking and hopefully, transfer that to customers. Use of cards, M-Pesa, M-Kesho, M-Shwari and other Ms will greatly change the way we run banks and hopefully reduce the interest rates. Access to affordable credit will remain a sure route to faster economic growth-one of our national aspirations.