Banks exploit policy gap to inflate short-term loan rates
Higher rates of default by borrowers are pushing up the cost of short-term debts that include credit cards and mobile loans.
A top tier bank has already written to its customers alerting them of an increase in the interest it charges on credit cards.
“Due to the increase in cost of credit, we would like to inform you of the change in the monthly interest rate for your credit card from 1.08 per cent per month to 3.5 per cent effective July 19, 2019,” the bank said in a June correspondence to customers.
This means customers will have to part with 42 per cent interest per year if they use their credit card every month.
“The increases are due to the high risk-profile of these services. Banks are seeing increased default rates on these products and so are being forced to raise the interest to cover for the write-offs,” said Antone Wambura, the executive director of Lake National Sacco.
According to Wambura, a former bank manager, most Kenyans are forced into default due to the high cost of living and a tough economic environment that has made life difficult.
Similar sentiments were expressed by a senior bank manager who asked not to be named as he is not authorised to speak to the media.
“Simply put, things are tough. People are struggling and banks know this so they are taking measures to cover any write-offs,” said the manager.
Similarly affected is the cost of mobile loans. Another top tier bank has warned its customers that they would have to shell out more cash as interest for its mobile loans.
“Dear customer, your next loan will be charged at 7.5 per cent of the borrowed amount to be repaid after 30 days,” read the SMS sent to customers.
Yearly, the bank’s customers will pay 90 per cent interest if they take up a mobile loan every month.
Commercial banks are required to get approval from the Central Bank of Kenya (CBK), the sector regulator, before implementing adjustments to their credit card fees or informing their customers of the same.
Currently, a total of 265,548 credit cards have been issued by banks according to data from the CBK website.
Hiking of interest rates comes against a tightening of liquidity (money supply) with the average interbank rate – the rate of interest on short-term loans between banks – growing from 2.4 per cent in July to 3.5 per cent even as CBK sold more dollars to banks as the local currency came under pressure from a stronger US dollar and weaker Chinese currency, the yuan.
The interbank rate is generally regarded as a reliable indicator of liquidity levels in the banking sector. The phrase “increase in cost of credit” used by banks to hike interest rates of short-term loans is a pointer to tighter liquidity in the interbank market.
While CBK has received praise for restoring discipline in the money market and keeping the local currency stable, the shilling is facing pressure from the ongoing trade war between China and US, with US President Donald Trump labelling China a “currency manipulator” for allowing the yuan to drop, thereby making China’s exports cheaper.