Kenya: A bank, like any other business, has to make a profit and has operational costs to consider. But this has not made it easier for customers to accept the rate of interest charged for credit facilities, particularly when it seems to only benefit banks’ bottom lines.
To allow customers to shop for better credit deals, as well as promote transparency in the sector, banks in Kenya have adopted the Annual Percentage Rate (APR) pricing mechanism. This formula enables consumers to compare different bank loan costs based on standardised parameters and a common computation model.
APR is one of the industry interventions spearheaded by the Kenya Bankers Association (KBA) in collaboration with the Central Bank of Kenya (CBK).
“As an industry, we have enhanced pricing disclosures to enable bank customers make more informed choices. This is one of the mechanisms embraced by banks to address issues relating to easing access to credit,” said KBA Chief Executive Habil Olaka.
COMPETITIVE RATES
The APR mechanism promotes pricing transparency, which not only stimulates competitive interest rates, but also promotes consumer protection by standardising disclosures during the application process, he added.
“The interest rate charged for lending is based on the spread over our cost of funds and also the risk of the borrower. Obviously, large corporate customers get more favourable rates than individuals who are borrowing a smaller amount, which may or may not be fully secured,” said Arun Mathur, the CEO of I&M Bank during an online discussion organised by KBA.
Interest rates are market driven and, therefore, not entirely at the discretion of a bank.
“It is advisable to shop around as the variety of products available in the market is quite varied and can suit all kinds of requirements. It is also useful to develop a track record with the Credit Reference Bureau and use that information to benefit on pricing,” added Mr Mathur.
Interest rates are determined by the risk, opportunity cost, and inflation. This applies both for the deposit and lending rates.
“Practically, the lending rate is a function of the cost of funds, the cost structure of an institution, and the risk factors ... in most cases you will find the lending rate more driven by the cost of funds than other factors,” said Consolidated Bank CEO David Wachira.
Informed decision
Currently, banks are required to provide loan applicants with a breakdown of the total cost of credit (that is, bank charges and third-party costs associated with the loan facility, such as legal fees), and a loan repayment schedule, in line with Central Bank Prudential Guidelines.
Institutions must also disclose the APR, which takes into account the interest rate component, bank charges and fees, and third-party costs.
KBA advises customers to ensure they have a breakdown of credit costs and a repayment schedule before signing a loan agreement.
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This is intended to empower the customer to make an informed decision as well as compare the fees and charges in the market.
The list of additional bank charges that a credit seeker should be aware of include application and processing fees and monthly service fees. Third-party costs include brokerage fees, attorney and notary fees, total credit life insurance, Government levies and valuation costs.
Banks also add an interest rate premium to the Kenya Banks’ Reference Rate (KBRR). This premium is based on the bank’s risk margin, its cost of doing business and the return on equity.
“When deciding whether or not to approve a loan application, a bank considers each individual’s personal circumstances, which includes employment status, average living standards, the expense profile of the borrower, other credit facilities he or she has access to and the performance of those credit facilities, and ultimately his or her repayment capacity,” said GTBank Managing Director Adekunle Sonola.
Though introduced just over two months ago, there has already been huge public interest on how APR and KBRR will affect access to banking services, said Middle East Bank CEO Dhiren Rana.
“APR is actually a comparison tool, where a consumer is able to compare the total cost of credit from different competitors. Therefore, one can approach a number of banks and get the APR quotes and make an informed decision .... This will increase the competition across the various loan products that banks offer,” he said.
Evelyne Wanjiku, an analyst at Genghis Capital, added: “When looking for credit from a bank, the key concern for a customer should be the interest rate charged on a loan.
“In case of floating rate borrowing (where monthly installments fluctuate depending on the rise or fall in market interest rates), one should look out for any refinancing or restructuring options available based on interest volatility.”
This means customers need to be aware of the finer details of their monthly repayments and what impact they will have on their bank balance and lifestyle.
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