Kenya's competition agency comes face to face with banks’ muscle

No one better understands how brutal Kenyan banks can be than Francis Kariuki Wang’ombe — the man mandated to protect consumers from cartels.

In the aftermath of the shocks in the banking sector presented by the collapse of three lenders in quick succession, Mr Wang’ombe came face to face with the giant problem many ordinary Kenyans are struggling with, largely in silence.

The Competition Authority of Kenya (CAK), which he heads, was shopping around for a bank that would offer a good return on term deposits for Sh150 million it had lying in its accounts.

“The best offer we could get from the bigger banks is 7 per cent,” said Wang’ombe. Only last year, he would easily have got about a 13 per cent return on deposits of a comparable amount.

Unacceptable offers

The money was to be spent “months” later, which informs the decision taken by many State ministries and agencies to lend money to banks for agreed periods.

“We found the offers to be unacceptable,” he said at a roundtable with business journalists last week.

Second and third-tier lenders were readily offering about 12.5 per cent, but their battered perception raised their risk profiles, inadvertently driving away potentially large depositors like CAK.

Large banks became huge beneficiaries of the fallout, cutting their costs for attracting customer deposits, but not passing on the benefits to their borrowers through cheaper loans.

Only new loan offers are priced at below 20 per cent, while interest rates on existing loans are still calculated at 2015 levels, when the Central Bank of Kenya (CBK) had tightened monetary policy to discourage fresh borrowing. This was a stop-gap measure to stem the fall of the shilling.

But what was hoped to be a temporary but painful measure has become a boon for banks.

In the policy intervention taken by the CBK, average lending rates were about 15 per cent before banks adjusted the pricing on outstanding loans to up to 25 per cent.

While the sentiment now is that the economy is in better shape than early last year on account of falling inflation, a stable forex rate and a declining savings rate, lending rates remain elevated.

It would be especially worrying as seven of the largest banks Wang’ombe was referring to control 80 per cent of all banking business of accepting customer deposits and giving loans.

CAK does not rule out cartel-like tendencies in the banking sector, but is guarded in making such a declaration before an ongoing study is finalised.

Better environment

Findings from the first phase of a study in the banking sector have shown that Kenya provides a better environment that most of its peer countries in both regulation and barriers to entry.

In the case that the findings indicate the existence of cartels in the banking sector, the sanctions could be costly, running to 10 per cent of lenders’ annual turnover, as prescribed in draft regulations.

Mohamed Nyaoga, the chairman of the CBK, however, believes that banks are operating like a cartel.

Banks are paying savers less than 2 per cent, against loans that are priced above 20 per cent, he noted.

“Are banks charging too high? Yes, they are,” Mr Nyaoga said, qualifying his sentiments.

While CBK is the regulator in banking, the possibility of collusion among banks in pricing their loans would fall under CAK’s mandate, as this would qualify as abuse of competition laws.

Nyaoga has hardly spoken about the banking sector since his appointment last year alongside Governor Patrick Njoroge.

“We have been labelled activists because we have been trying to empower consumers,” said the CBK chairman in reference to the regulator’s repeated calls to have banks cut their lending rates and its publication of a list of most expensive lenders.

Dr Njoroge, who is against regulating lending rates through the law, has been categorical that banks need to urgently reduce the cost of credit, but he has achieved little or zero success in his push.

And in his most recent review of the monetary policy, the CBK governor favoured an “easing stance”, which should translate to lower lending rates.

Cheaper credit

Cheaper credit, he said, would spur heightened economic activity this year to ensure national growth, as measured by gross domestic product, hits 6 per cent.

In essence, the Monetary Policy Committee (MPC), which Njoroge chairs, had frowned upon the cost of loans, which the distinguished economists felt was constricting the economy from achieving its full potential.

Frustrated by the reluctance by lenders to reduce their interest rates, the National Assembly is debating a motion that would prescribe a floor on the savings rate paid by banks and the interest charged on loans extended to borrowers.

A proposal being considered by MPs is looking to cap lending rates at 4 per cent above the prevailing benchmark rate issued by the CBK.

Savers will also be assured of interest at 4 per cent below the set benchmark.

The current benchmark rate, also called the Central Bank Rate (CBR), is 10.5 per cent. Had the proposal been enacted, interest on loans in the market would be capped at 14.5 per cent.

The interest on savings, on the other hand, would be 6.5 per cent.

The proposed legislation is not very popular with banks, as it could gravely impact what has been uninterrupted growth for more than a decade.

A common defence from banks to justify the high lending rates is the rising levels of defaults. However, CBK bosses think the lenders only have themselves to blame for this.

Weak lending practices, including extending unsecured loans to bank directors and their associated companies, have led to a spike in non-performing loans (NPLs) in the sector.

By the end of April, for instance, total NPLs in the sector were 8.2 per cent of total loans. This after stricter financial reporting guidelines on disclosures were enforced by CBK.

However, only a year earlier, the bad loans made up just 5 per cent of the entire sector’s loan book.

Bankers often turn to the level of defaults in pricing their loans. Thus, higher NPLs that may be a result of stricter regulations — rather than a spike in non-payment — could still be loaded onto the effective lending rates.

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