Are you looking for a loan? These are Kenya’s most expensive and cheapest banks
For many loan seekers, the first question they ask potential lenders is the interest rate.
This ends with determining the amount they will borrow. But an analysis of the Financial standard shows that the interest rate differential between the banks has converged at around 13 percent, but customers can save thousands of schillings depending on their lender choice.
This is due to fees such as the appraisal fee, negotiation fee and credit life insurance, which vary from bank to bank. All of this adds up to the total cost of borrowing, even for banks with equal interest rates.
A compilation of loan cost data from the Kenya Bankers Association (KBA) website shows that a customer seeking a Sh1 million secured loan that is repayable within a year can save nearly Sh100,000 depending on the preferred lender. Banks’ fees, commonly referred to as negotiation or valuation fees, and external fees (also known as third party costs), which include insurance and excise duties, are now emerging as competitive points for lenders as interest rates converge.
A data table based on what it would cost a borrower to repay an unsecured loan of Sh1 million for 12 months shows that the most expensive lender charges Sh98,880 as bank and external costs.
For example, the total cost of such a loan from Family Bank – which is the most expensive – is more than double that of the Bank of Baroda – the cheapest lender. This is despite the fact that the interest rate difference between the two lenders is only 0.18 percentage points.
KBA chairman John Gachora, who is also chief executive of the NCBA Group, said valuation and insurance fees vary depending on the type of product and segment – corporate, retail, or small and medium-sized enterprises (SMB).
“Banks that do a lot of private and SME banking tend to charge slightly more fees because the loan itself is smaller. If you go on corporate lending like us (NCBA) the fee will be lower because the loan is large, ”Gachora said.
“If a lot of your customers are repeat customers, it also means that you’ve already done most of the hard work analyzing and knowing them. You may be willing to charge them a reduced fee for subsequent loans. ”
Banks typically seek approval from the Central Bank of Kenya (CBK) for the maximum fees they can charge on loans, allowing them to negotiate with any customer but not beyond the regulator’s cap.
Some banks also tend to lower fees depending on what they want to achieve. For example, campaigns to promote wealth finance may come with reduced fees.
The additional fees on top of the interest rates increase the actual cost of financing to borrowers over the life of the loan – technically known as the annual percentage rate of return (APR).
Small banks have a lower APR, with Baroda APR currently standing at 12.82 percent, compared to 33.3 percent for Family Bank, Absa (22.1 percent), Equity (20.08 percent), and KCB ( 19.91 percent).
The different non-interest fees reflect the desire of small banks to attract customers from the big players with enormous market power that allows them to charge higher fees.
Comparisons based on data on the website www.cost-of-credit.com show that Family Bank, Middle East Africa Bank, Ecobank Kenya, Absa Kenya and Standard Chartered Bank of Kenya top the list of the most expensive lenders. Bottom banks like Bank of Baroda, First Community Bank, Credit Bank, Victoria Commercial, and M Oriental Bank are among the cheapest banks.
For example, a loan of Sh1 million repayable in a year from Family Bank currently costs a borrower Sh170,687, up from Sh115,624 that the lender calculated in March.
This consists of Sh71,807 interest, Sh30,000 processing fee, Sh60,000 credit life insurance, Sh2,400 service fee and Sh6,480 excise tax.
Same interest rate
The increased non-interest fees have led Family Bank to overtake Ecobank, Sidian and Absa as the most expensive lenders.
The same loan from Ecobank will cost a borrower Sh121,407.
This is made up of Sh75,357 total interest, Sh30,000 application fee, Sh10,050 insurance and Sh6,000 excise tax.
Borrowing Sh1 million from Absa Bank, on the other hand, costs Sh118,007, including non-interest fees of Sh46,200.
Credit Union and Equity Bank borrowers will incur Sh111,929 and Sh108,057, respectively, for the same loan.
A similar amount at Victoria Commercial, at an interest rate of 13 percent per year, costs Sh83,807, which is Sh86,880 less than Family Bank.
The difference is that Victoria has the same interest rate.
This is because the Family Bank’s non-interest fees are 8.24 times higher than Victoria’s.
The reason the NCBA, which has the lowest average interest rate at nine percent, can rate its loans as such is because it focuses more on corporate than personal loans.
“We’re primarily a corporate bank, so the nine percent is the average. If you came for Sh1 million as a person, we will likely ask for more. We charge less for companies that borrow billions. That lowers our average, ”said Gachora.
A Sh1 million secured loan from the Bank of Baroda costs an average of Sh70,794, making it the cheapest lender despite having its interest rate set at 12.82 percent.
This is up from Sh60,580, which the bank charged at an interest rate of 11 percent in March.
KCB, whose total secured loan cost of Sh1 million was Sh71,807 in March, has now updated its filings to include noninterest fees and send the cost to Sh107,207.
The lender now announces that it will charge Sh25,000 as the assessment fee and Sh5,400 credit insurance fee for the one year loan.
Almost a third of lenders did not post any non-interest fees on the website in March, designed to help borrowers decide where to get credit.
Such loopholes were seen as blunting the usefulness of the website, which was launched as a partnership between KBA and CBK to help loan seekers make informed decisions. KCB, Mayfair Bank, UBA Bank, DIB Bank, Africa Banking Corporation, Paramount Bank, Development Bank of Kenya, Middle East Commercial, Bank of India and Credit Bank did not announce any non-interest fees in mid-March. But now the majority of them have updated their statements to include the charges after media coverage highlighted the anomaly that caused concern among KBA members.
Their fees range between Sh12,000 and Sh36,000.
KBA has always believed that banks should be reminded every two weeks to adjust total credit costs to changing credit conditions so that borrowers can make informed decisions.
Initially, lenders updated their details every two months after the regulator’s Monetary Policy Committee (MPC) meetings.
The large lenders’ high borrowing costs are despite access to cheap deposits, with disclosures from top banks showing that at least 70 percent of their deposits do not earn interest.
Interest rates were subdued in the Covid-19 era, banks quoted them at an average of 12.12 percent until the end of August. The general decline in lending rates was partly triggered by the lowering of the CBK reference rate from nine percent in November 2019 to the current seven percent.
Bad loans are now down for the fifth straight month to close July at Sh433.3 billion, encouraging banks to lend more.
The defaults had reached a high of 444.2 billion Shillings in February.
The declining inventory of bad loans amid increased lending gives hope that businesses and households’ financial health will improve and help them settle interest and principal payments.