Small lenders lead in race for cheap loans

A new report from the Central Bank of Kenya (CBK) on commercial banks shows significant competition in lending rates.

From the report published on Friday, small-sized lenders Premier Bank, Access Bank and Consolidated Bank of Kenya lead the pack in the overall ranking of Kenya’s cheapest lenders.

Their average lending rates stood at nine per cent, 11.41 per cent and 13.42 per cent respectively.

They are closely followed by other small-sized lenders Kingdom Bank - a subsidiary of Co-op Bank - and Ecobank Ltd at 14 per cent and 14.31 per cent respectively.

Diamond Trust Bank (DTB) leads at an average rate of 12.41 per cent followed closely by Cooperative Bank with an average rate of 15.14 per cent among tier-one lenders. 

Equity Bank Kenya, the largest bank by customers, also ranks high among tier-one lenders offering affordable loans at an average lending rate of 16.20 per cent. 

Analysts say this competitive environment is crucial for small business owners seeking loans to expand operations. 

Entrepreneurs like Maina, who runs a small business in Naivasha are acutely aware of how even slight differences in rates can impact their growth prospects.

“Finding the right bank is crucial,” he said. “Every percentage point matters.”

As the lending landscape in Kenya becomes increasingly competitive, small business owners are discovering new opportunities, underscoring the importance of both favourable rates and strong banking relationships in driving economic growth.

This comes at a time when pressure is mounting on commercial banks to reduce loan rates following the recent cut in the Central Bank Rate (CBR).

Equity Bank was among the first to respond. CBK lowered the Central Bank Rate (CBR) on August 6 from 13 per cent to 12.75 per cent to encourage lending as banks have been hesitant to extend credit due to rising concerns over non-performing loans (NPLs). 

Historically, banks have been quick to raise rates whenever the CBK increases the benchmark rate, often citing rising costs of funds as justification. 

This pattern has raised expectations that they would be equally responsive in lowering rates following the recent cut.

Equity Bank recently reduced its Reference Rate from 18.24 per cent to 17.83 per cent, a move aimed at stimulating credit uptake amid a challenging economic landscape.

In a notice to customers, Equity Bank stated, “We wish to inform our customers and the general public that we have reduced Equity Bank's Reference Rate (EBRR) to 17.83 per cent effective September 9, 2024.” 

The new interest rate will be EBRR plus a maximum margin of 8.5 per cent per annum for all new Kenya shilling-denominated credit facilities.

As Equity Bank sets the pace, other banks are under pressure to follow suit in reducing loan rates to enhance credit accessibility and stimulate economic activity in the face of rising default risks.

It remains to be seen whether more banks will follow suit.

The ratio of gross NPLs to gross loans increased to 16.3 per cent in June, up from 16.1 per cent in April, highlighting the growing challenges borrowers face in repaying loans.

The banking sector’s reluctance to lend has contributed to a slowdown in private sector credit growth, which fell to four per cent in June from 4.5 per cent in May. 

This cautious approach comes as banks grapple with the implications of a deteriorating economic environment, compounded by a 1.5 per cent decrease in gross loans.

CBK attributed the increase in bad loans to both the decline in lending and exchange rate valuation effects on foreign currency-denominated loans following the appreciation of the shilling.

The Monetary Policy Committee’s (MPC) decision to lower the CBR was aimed to spur credit growth and support the economy, which is projected to grow by 5.4 per cent this year, down from 5.6 per cent in 2023.

However, the outlook remains uncertain, influenced by various risks, including geopolitical tensions.