Banking: Consumers are feeling the pain of rising bank fees

Kenyan money

NAIROBI, KENYA: To borrow the phrase of economist David Ndii, ‘Kenyans relationship with lenders is of an abusive marriage’.

However, they are not interested in talking divorce. The lenders have tactfully sucked out all life from unsuspecting customers through numerous charges.

It is a Monday afternoon and Hussein (Whose other names we have deliberately withheld) walks into Barclays Bank having deposited a Sh320,000 cheque on Friday.

It is only hours from maturity but he urgently needs Sh120,000. The bank allows him to withdraw the money after cross-checking the cheque.

What he does not know, is that they will charge him Sh3,960, without having forewarned him that taking the cash before a cheque matures attract higher costs. He is charged Sh3600 for the advance payment and another Sh360 for fast-tracking the cheque clearance.

From charging Sh50 to certify a single page of a bank statement, to charging higher fees on money transfers without revealing costs upfront to their customers or even applying charges that not necessarily fit a product, Kenyan lenders are in the wild west.

With the capping of interest charges, lenders are betting on these fees and commission charges as profit boosters. The hope these new revenue streams could be able to mitigate the impact of narrowed lending margins.

“I stopped checking the balance on my Co-operative Bank mobile application when I realised that the bank charges me Sh35 and a further Sh3.50 as excise duty,” one customer pointed out.

What could be even surprising is that CBK Governor Patrick Njoroge would like banks to revert back to the laisses faire environment where lenders will have a free-hand on how to price loans.

He has assured the public that he will see to it that banks do not arbitrarily charge punitive interest rates as they did before the Banking (Amendment) Act 2016 came in and put a brake on it. 

Unfortunately, for the year or so that interest rates have been capped, CBK and National Treasury have put nothing in place to assure the public that banks will not prey on them again.

And the latest rise in fees on customers signal tough times ahead for depositors. It begins with the minimum balance amount falling below a threshold, to charges whenever one swipes the debit card at a merchant or even withdrawing more than a specified number of times at the ATM. Every payment transfer from your account leads to fees. Be it credit card or debit card, the banks end up earning a fee either from the customer or from the merchant.

The lenders, however, aren’t feeling the pinch of customer bitterness yet, but it has drawn the attention of the regulator, but unfortunately no clear answers are forthcoming to put a lid to the feeepidemic that banks are using to cover for shortcomings in loan interest income.

Joe Musyoki, a financial auditor in an opinion article expressed shock how banks were charging ‘deposit mobiilisation fees’ which initially covered for underfunded cheque but the fee has since been extended to customers seeking overdraft or loan.

Bailout

Essentially, the fee was a penalty charged to a customer who issued cheques without enough or sufficient funds. The bank justified it arguing that it had to look for money elsewhere to bailout the customer when he needed cash.

“To make it worse, customers who overdraw their accounts are not being charged mobilisation fees, but new class of charges christened overnight fee ranging from one to 10 per cent per night on the overdrawn amount,”  Musyoki wrote in a local daily.

The charges banks levy on customers range from the absurdity to  unreasonable fees such as being forced to deposit Sh220 to reactivate a dormant Equity Bank account.

A recent study by Financial Sector Deepening Kenya (FSD) discovered that banks were charging various fee and commissions that it was even confusing to their staff such that by approaching two tellers in the same banking hall, the researchers were given completely different charges on the same product.

Information on withdrawal fees and ledger fees were readily available.

However, information on other costs such as bank-to-mobile transfers, costs of mobile banking when using the bank’s app versus using the bank’s paybill, salary-processing fees and intra-bankversus inter-bank transfers were difficult to get.

“In most instances, this obscurity did not seem intentional. To the contrary, it seemed to stem from a lack of standardised tariff information and how this should be organised and presented,” FSD noted.

FSD also found that decision to charge an account was not necessarily based on which account it was, as some lenders did not charge accounts so long as the clients maintained a certain level of minimum balance.

Some banks charge a customer and then later on waive the charges or apply loyalty rebates to give back the money. “It becomes difficult for a customer to know exactly what he or she is being charged for,” indicated the FSD report.

The report has also laid bare hidden costs of maintaining bank accounts, including ledger fees, something that most Kenyans have over time assumed was a thing of the past.

A decade ago when lenders were charging rent on bank accounts, Equity Bank which rose from a microfinance offered waiver as it joined the top tier banking family. Its action literally attracting millions of customers with a promise not to charge ledger fees.

Since then, most lenders scrapped mediocre payments, reduced the charges of transferring money, especially in the era of stiff competition on money transfer from telcos to lock in depositors.

But even as the country progressed and a massive number of Kenyans joined the fray of bankable clout, it still costs a lot of money to operate an account.

The report by FSD on transparency of holding an account at a Kenyan bank shows that on average, some customers may unknowingly be paying as much as Sh10,000 annually and that these banksincentivise their staff to sell their various services that are bound to have a bearing on depositors’ savings.

The two-year survey indicated that some bank customers are forced to pay up to Sh14,000 a year in account maintenance fees alone, adding to the cost of accessing financial services.

Standard Chartered Bank’s ordinary current account was found to be the most expensive with a yearly cost running to Sh13,460 or an average or Sh1,120 per month, followed by Barclays’ Ultimate account and Stanbic’s Smart Banking account charge of about Sh12,000 and Sh10,000 per year respectively.

The cheapest account to maintain was Co-operative Bank salary account that levies customers Sh3,629 a year, or Sh302 per month, alongside KCB’s Jiinue and Bankika accounts

While the Central Bank of Kenya (CBK) indicates it will push for the removal of the rate cap, concerns are growing that the policy reversal will leave Kenyans at the mercy of ‘greedy’  lenders. Depositors are convinced that banks would return to their old habit of milking them dry.

George Bodo, a banking sector analyst and head of financial desk at Ecobank Capital says while CBK has been able to tame appetite for non-interest charges, there was no framework to guide lenders on loan charges after the interest caps are removed.

“For non-interest charges, CBK has decided not to approve beyond the inflation rate and have limited the number it approves within a given year,” noted Bodo.

CBK Governor Patrick Njoroge disclosed that the regulator had rejected 13 out of 16 commercial bank request for permission to increase charges since September last year.

However data from the Kenya Bankers Association a website dubbed the Cost of Credit Calculator showed that despite there being a cap on lending at 14 per cent, there was higher cost of credit by the big banks arising from the numerous and larger non-interest charges, including appraisal and processing fees on the loans.

Credit cost

The website is supposed to increase transparency by giving an estimate of the total cost of credit arising from a consolidation of the fair estimate of each lender’s interest rates, bank charges and feesas well as third-party costs that are specific to each product.

The data showed that Barclays Bank of Kenya, Equity Group and NIC are the most expensive lenders on a short-term loan of Sh1 million.

Victoria Bank is the cheapest of the 32 lenders in the KBA database with a similar loan costing Sh77,445, largely because the lender charges no fees on the loans other than interest as prescribed in law. GTB comes in a close second with a total cost of credit of Sh77,555, which includes a Sh110 fee.

Even as the CBK, Treasury, KBA and the International Monetary Fund push for the lifting of the rate cap, consumers are wary that the move will return borrowers to the dark days where banks would rip them off their hard earned cash.

Lobby group Consumer Federation of Kenya (Cofek) says that as it currently stands, CBK seems incapable of demonstrating it can protect borrowers from banks’ charges, unregulated fees or even deciding to arbitrarily raise interest rates.

“Cofek will do everything possible to ensure the rate cap are not removed until such a time when CBK and National Treasury addresses the non-transparent pricing of loans and reduction of the cost of credit,” Cofek Secretary General Stephen Mutoro said.

Little is known as to whether the regulator actually enforces disciplinary measures on lenders who abuse their position. Banking fines remains a highly guarded secret, while the process of making a complaint also remains opaque - making it difficult to gauge internal discipline level in the sector.

CBK did not respond to our queries on how they would deal with lenders that were busy sneaking in creative ways of milking borrowers to mitigate the negative impact of narrowed lending margins brought about by interest caps.

However, Kenyans seem to be inelastic in terms of sticking with their lenders even when CBK, KBA and FSD release transparency report detailing where they are being bled.

It’s surprising that with all the information now available, most depositors are reluctant to leave banks that charge high fee, loan processing charges or have expensive account maintenance cost.

CBK noted that the top-tier banks which controlled close to 80 per cent of the market - KCB, Equity, Standard Chartered and Commercial Bank of Africa (CBA), could increase their loan rates at a pace higher than the industry’s average and yet are still able to control the market.

“I think the issue is market dominance, they feel they can throw their weight around because they have a large network and a wide array of services, so they feel comfortable that they do not need to change,” Dr Njoroge said in 2015.

Before the rate cap came into force, the CBK boss had urged borrowers to walk out of banks that refused to lower interest rates and that they should demand better services. But the Governor’s call failed to gain traction and banks remained bullish after such pleas fell on deaf ear.

“Commercial banks need to lower their rates in a proportionate way. This is where people need to vote with their feet, I mean why do you feel trapped, if you think it is a high rate why not move to another bank, vote with your wallet,” Njoroge had said at the time.

According to a recent report by Oxford Business School, the big banks still control majority of deposits and loans as Kenyans have chosen to stick with them regardless of their charges.

“As tier one banks continue to expand, tier II and tier III banks are seeing their share of the market shrink,” Oxford Business School said in the Report Kenya 2017.

Brand loyalty

One of the problems in Kenya is that demarcation of the market is informed either by racial inclination or brand loyalty. The Asian communities prefer to bank with Indian-owned banks, while Africans stick to State owned banks or are informed by generational factor.

However, the current young generation are being persuaded by tech-savvy banks such as Chase Bank and other upcoming mid tier banks willing to embrace technology.

This segmentation is wild and wide that lenders are not attuned to cater for specific needs of the market, while customers do not necessarily shop for the cheapest offers.

Banks also have deterring conditions when offering loans by asking borrowers to open accounts with them as a condition, especially unsecured loans.

Although Kenyans tend to have so many accounts most of which are dormant and only get loans from accounts that are active. This makes shopping for a bank with friendly tariff regime non-existent.

Kenya lenders have also traditionally relied in levying flat interest rates which tend to punish good borrowers who unknowingly should the burden of  defaulters.

Banks have also traditionally given large corporates favourable rates, while offering punitive rates to small retailers.

This strategy, however, is backfiring on them lately as loans to these so-called blue-chip companies getting special rates turnout to be more risky venture.

For instance, banks paid the ultimate price for loan to Kenya Airways, Uchumi, Nakumatt, and other top firms which has now come back to haunt the lenders.

Two corporate lenders alone, Nakumatt and Kenya Airways owe banks Sh31 billion in unsecured loans and currently both cannot pay. “The challenge remains that credit pricing is practically infantile and ‘name-based’,” noted Rich Management Chief Executive Aly Khan-Satchu

“For a credit corporate bond market to lift off - we need to see better and more sophisticated credit based pricing,” explained Satchu.

Mr Bodo says CBK should help consumers who are rated highly by rating agencies but fail to get favourable rate from lenders. The bank of last resort, he reckons, should have a framework that forces lenders to always offer rates that are in line with customers’ credit profiles.

Reward scheme

“What needs to be done is that banks should be encouraged to reward good borrowers where if you have a good credit score, you get a lower rate or a discount,” Bodo said.

CBK has previously said it is trying to reform client classification with the help of Credit Reference Bureaus and information sharing agencies.

The high cost of credit is often cited as a constraint for businesses, according to World Bank’s Doing Business Survey 2016, which ranked Kenya at 28th among 189 countries.

 The law capping interest rates at no more than four per cent above the Central Bank benchmark was effected in September last year.

Banks are now turning focus on trimming their workforce and deepening their digital products to boost efficiency.

At least nine lenders have announced job cuts in efforts to protect profits. KCB is cutting at least 500 jobs to save at least Sh2 billion per year while Barclay is expected to cut at least 130 jobs.

Bank of Africa, National Bank of Kenya, Sidian Bank, Family Bank, First Community Bank, Standard Chartered Bank and Ecobank have also announced staff cuts.

The sector, through its lobby group, Kenya Bankers Association, and individual chief executives, maintain that the cap was ill-founded.

National Treasury and Central Bank of Kenya, on the other hand, say they are still studying the impact of the cap even though they are on record opposing the amendment prior to it being passed by Parliament.