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The ranking is based on a tabulation of what it would cost a borrower to repay a Ksh1 million unsecured loan over a period of 12 months. The KBA data shows that the higher cost of credit by the big banks arises from the numerous and larger non-interest charges, including appraisal and processing fees, on the loans.
A Ksh1 million one-year loan from Barclays, for instance, will cost a borrower Ksh135,245, including a Ksh57,800 fee that is equivalent to 42 per cent of the total cost of credit.
Borrowing the same amount of cash from Equity Bank will set one back Sh132,445, including fees of Sh55,000. NIC charges Sh121,445 for a similar amount, including a non-interest fee of Sh44,000.
“Small banks don’t have the bargaining power that large lenders have,” said an investment analyst who did not wish to be named because he does consultancy work for the industry.
“Big banks are also been keen to avoid further erosion of their margins following last year’s capping of lending rates,” he said, adding that the lenders’ larger economies of scale should ordinarily allow them to charge lower fees but they have not done so.
The effect of the higher bank charges on profitability is even more pronounced on shorter-term loans that allow banks to increase the frequency of the fees that appear only once on long-term credit facilities.
Equity, the country’s largest retail bank, for instance charges Sh5,000 for a one-month Sh100,000 loan. This brings the total cost of such credit to Sh6,667, of which only 17.5 per cent is interest.
Annualised, the repayment cost amounts to more than 80 per cent of the principal, according to the KBA data.
This may explain why major retail banks, including Equity and KCB • 37.75, reduced the repayment period for most of their mobile phone-based lending to one month after the law capping of interest rates came into force in September 2016.
The KBA data confirms that most borrowers are more concerned with ease of getting credit than its cost, a trend that has seen lenders charge different rates based on their customers’ profile.
(Source: Business Today News)