According to the Central Bank of Kenya (CBK), the private sector credit growth declined in 2021 coming in at an average of 7.8%, in comparison to the 8.0% recorded in 2020 partly due to the cautious lending strategy adopted by banks during the COVID-19 operating environment. The graph below compares the private sector credit growth in 2020 and 2021:
The most common options for credit in Kenya include mobile money, banks, informal groups, insurance, digital apps and microfinance institutions. According to the 2021 FinAccess Report, as of 2021, mobile money was the most used financial platform accounting for 81.4% of users, followed by banking institutions at 44.1%, then informal groups at 28.7%. The usage of digital loan apps declined to 2.1% in 2021, from 8.3% in 2019 mainly due to increased competition from bank-based product innovations, unfair debt collection practices by the Digital Loan Apps, non-listing of borrowers to the Credit Reference Bureaus (CRBs), and anticipated regulation of the Apps by the CBK. The graph below shows the evolution of credit uptake over the last five years;
In our analysis of the true cost of credit, we have ranked the most expensive banks, based on the Annual Percentage Rate, a metric that factors in additional costs and fees on the annual interest rate (APR), as of 3rd February 2021. We have assumed that an individual has taken up a Kshs 1.0 mn 3-years personal secured loan or a Kshs 1.0 mn 3-years personal unsecured loan under the up-to 5 years category. For mortgage, we assume an individual takes up a Kshs 3.0 mn 10-year mortgage loan for a mortgage worth Kshs 8.6 mn and pays a 10.0% deposit. Below is a summary of the top five most expensive banks for the three categories;
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Personal Secured Loans - Most Expensive Banks |
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|
No. |
Bank |
Annual Interest Rate |
Other Charges |
Annual Percentage Rate |
|
1 |
Middle East Bank |
17.0% |
5.9% |
22.9% |
|
2 |
Guaranty Bank |
13.0% |
6.7% |
19.7% |
|
3 |
Kingdom Bank |
16.0% |
2.6% |
18.6% |
|
4 |
Family Bank |
13.0% |
4.3% |
17.3% |
|
5 |
Eco Bank |
13.6% |
3.3% |
17.0% |
|
Median |
13.6% |
4.3% |
18.6% |
|
|
Avg. Top 5 Most expensive Banks |
14.5% |
4.6% |
19.1% |
|
|
Personal Unsecured Loans - Most Expensive Banks |
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|
No. |
Bank |
Annual Interest Rate |
Other Charges |
Annual Percentage Rate |
|
1 |
Family Bank |
13.0% |
18.8% |
31.8% |
|
2 |
Kingdom Bank |
13.0% |
17.8% |
30.8% |
|
3 |
Middle East Bank |
17.0% |
5.9% |
22.9% |
|
4 |
Guaranty Trust Bank |
13.0% |
6.7% |
19.7% |
|
5 |
I&M Bank |
18.0% |
0.0% |
18.0% |
|
Median |
13.0% |
6.7% |
22.9% |
|
|
Avg. Top 5 Most expensive Banks |
14.8% |
9.8% |
24.6% |
|
|
Mortgage - Most Expensive Banks |
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|
No. |
Bank |
Annual Interest Rate |
Other Charges |
Annual Percentage Rate |
|
1 |
KCB Bank |
13.0% |
28.7% |
41.7% |
|
2 |
Middle East Bank |
17.0% |
16.0% |
33.0% |
|
3 |
Co-operative Bank |
15.6% |
9.2% |
24.8% |
|
4 |
Prime Bank |
13.0% |
7.3% |
20.3% |
|
5 |
Diamond Trust Bank |
13.0% |
7.3% |
20.3% |
|
Median |
13.0% |
9.2% |
24.8% |
|
|
Avg. Top 5 Most expensive Banks |
14.3% |
13.7% |
28.0% |
|
Source: www.costofcredit.co.ke
For personal secured loans, the average APR for the top 5 most expensive banks is 19.1% with the average annual interest rate coming in at 14.5%. For personal unsecured loans, the average APR for the 5 most expensive banks is 24.8%, with the average annual interest rate coming in at 13.8%. For mortgage, the average APR for the top 5 expensive banks is 28.0% with the average annual interest rate standing at 14.3%.
On average, the annual interest rate for Kenyan top 5 most expensive banks is within a range of 13.8% - 14.5% for the various categories of loans offered. This is approximately 7.0% points higher than South Africa’s average annual rate which stands at 7.5% and 11.2% higher than USA’s 3.3%. However, Kenya’s average annual interest rate is 6.5% lower than Ghana’s average lending rate of 21.0%. We note that the high cost of credit has been one of the major challenges hindering the growth of the private sector. Additionally, digital lending apps have continued to charge high costs and consequently resulting in borrowers being affiliated with high interest rates leading to a rise in defaults. We believe that more needs to be done in order to spur the private sector credit growth. Below are some of the initiatives that the government can adopt;
- The establishment of a strong consumer protection agency and framework that implements and enforces consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. This will promote robust disclosures on credit costs, free and accessible consumer education, and enforcement of disclosures on borrowings and interest rates, as well as the handling of consumer complaints and concerns. This can be borrowed from the US government which following the financial crisis of 2008, established the Consumer Financial Protection Bureau, a body responsible for consumer protection in the financial sector. Recently, the bureau launched an initiative to reduce the exploitative fees after bank revenue from overdraft and non-sufficient funds (NSF) fees surpassed USD 15.0 bn, in 2019. The website provides a platform for consumers to share their experience and complaints on matters concerning fees for things they believe are covered by the baseline price of a product or service, unexpected fees for a product or service, fees that seem too high for the purported service or fees where it is unclear why they were charged,
- Increase competition to reduce over-reliance on banks - In Kenya, banks account for 95.0% of all funding, while only 5.0% comes from non-bank institutional funding, indicating that the economy is overly reliant on bank lending. The government can balance funding sources by diversifying non-bank funding, allowing borrowers to access more flexible and cost-effective funding options, and,
- Consumer education – The government should come up with ways of educating the public and providing guidelines on financial decisions. This will enable borrowers to acquire knowledge on issues like how to access credit, the use of collateral, and establishing a strong credit history. However, this will also require the adoption of risk based lending by banks where cost of credit varies based on a borrower’s credit history. The move will also increase financial literacy which will help borrowers analyse credit in terms of the costs associated and terms given by the lending institutions. This can be achieved by means such as introducing a website that breaks down the key fundamentals and guidelines on the basic information that consumers need to be able to make informed financial decisions.
For more information, kindly see our topical on Kenya’s Cost of Credit.
