Banks with the priciest, cheapest loans revealed in analysis

Co-operative Bank headquarters in Nairobi. [David Njaaga, Standard]

Data from the Central Bank of Kenya (CBK) reveals a competitive landscape among Tier-I banks, particularly regarding long-term loan offerings, with interest rates generally ranging between 13 per cent and 18 per cent for major lenders. 

Among the top three Tier-I banks by asset value and market share, Co-operative (Co-op) Bank maintains competitive rates, with personal loans at 15.54 per cent business loans at 16.14 per cent, and corporate loans at 15.63 per cent.

KCB Bank offers slightly higher rates of 18.24 per cent for personal loans, 18.06 per cent for business loans, and 13.50 per cent for corporate loans. 

Equity Bank’s rates are also notable, with personal loans at 16.93 per cent business loans at 18.02 per cent and corporate loans at 16.74 per cent.

Equity Bank, KCB, and Co-op Bank are particularly influential in lending to individuals, especially those in employment and to SMEs, making their lending practices crucial for the economy. 

On the other hand, Premier Bank and Middle East Bank (K) Ltd stand out at the lower end of the spectrum, charging nine per cent and 10.84 per cent, respectively. Conversely, SBM Bank and Guaranty Trust Bank impose the highest rates, at 21.29 per cent and 21 per cent.

Among the Tier-I banks, Diamond Trust Bank (DTB) offers the most attractive rates for personal loans at 12.25 per cent followed by Equity Bank at 14.06 per cent, Co-operative Bank at 15.37 per cent, KCB Bank at 16.28 per cent, Stanbic Bank at 17.31 per cent and Standard Chartered Bank at 17.81 per cent.

For business loans, KCB Bank leads with the lowest rate of 16.77 per cent, followed closely by Standard Chartered at 16.97 per cent, Equity Bank at 16.90 per cent, Co-op Bank at 16.75 per cent, and Absa Bank at 17.96 per cent. 

SBM Bank remains at the top end again, charging 21.33 per cent, followed by NCBA Bank at 20.8 per cent and Stanbic Bank at 18.89 per cent.

In the corporate lending space, Co-op Bank offers a competitive rate of 11.38 per cent, behind DTB. 

Other notable rates include Equity Bank at 16.02 per cent, KCB Bank at 16.40 per cent, Standard Chartered at 17.32 per cent and Stanbic Bank at 17.39 per cent. 

The highest rates in this category are charged by Stanbic (19.58 per cent), NCBA (19.12 per cent), and SBM Bank (19.15 per cent).

Regarding short-term lending, DTB again leads with the lowest interest rates for personal, business, and corporate loans, offering personal loans at 11.14 per cent, business loans at 12.40 per cent and corporate loans at 11.45 per cent as per the CBK report. 

Notably, Premier Bank provides the lowest overall interest rate of 9 per cent across all loan categories, while Credit Bank charges the highest rates—23.22 per cent for personal loans, 19.60 per cent for business loans, and 20.61 per cent for corporate loans.

In 2023, while many Tier-I banks raised interest rates in response to a tightening monetary policy, Co-op Bank surprised the market by maintaining lower rates.

This decision came amid a cumulative 375 basis point increase in the Central Bank Rate (CBR) to 12.5 per cent throughout the year, with significant hikes occurring in March, June, and December.

Despite these pressures, Co-op Bank kept its annual interest rate stable at 13 per cent, down from 14 per cent in April, until reverting in November in response to ongoing Monetary Policy Committee (MPC) actions. 

The bank attributed its decision to a strong loan repayment record and reduced default risk associated with its target check-off scheme loans.

“It is a deserved reward for customers, who have maintained a consistently good credit record,” said Co-op Bank of Kenya Group Managing Director Gideon Muriuki.

While short-term loans (1-5 years) typically attract higher interest rates due to the need to cover service costs, long-term lending significantly impacts individuals, businesses, and corporates.

Long-term loans have become increasingly appealing for banks, especially given the high default rates associated with elevated interest regimes.

Cytonn Investments forecasts that interest income growth will remain a key driver in the banking sector, highlighting a 29.8 per cent growth in the first quarter of 2024, surpassing the 25 per cent growth seen during the same period the previous year. 

This growth is partly attributed to persistently high borrowing costs.

Furthermore, the continued approval of banks’ risk-based lending models is expected to enhance their ability to price risk effectively, expand loan books, and consequently increase interest income.

This model, implemented by the CBK following the repeal of the Interest Cap Law in 2019, allows banks to make lending decisions based on predicted risks associated with each borrower.

“This shift signifies a move from traditional practices of blacklisting defaulters to a more nuanced credit scoring system that does not reject applicants solely based on their credit bureau scores,” says Cytonn.

This approach primarily targets borrowers involved in micro, small, and medium-sized enterprises, many of whom have struggled to secure traditional credit.

As of May 2023, 33 out of 39 banks in the country had their risk-based lending models approved by CBK, with Equity Bank being the first commercial bank to implement this system.