Interest Capping Law Doing More Harm than Good

Despite the positive intention behind the Banking (Amendment) Act, private sector credit growth declined to an 8-year low of 1.4 percent in July 2017 according to a report released by Cytonn Investments Limited.

The decline of the credit was attributed to the fact that banks preferred, and justifiably so, not to lend to consumers or businesses but invest in risk-free Treasuries, which offer better returns on a risk-adjusted basis.

“Following the capping of the interest rates, which excludes the extra charges, most commercial banks have taken advantage of the loophole allowing them to charge extra fees on the loans issued to increase the cost of credit well above the statutory ceiling of 14.0 percent, averaging 18.0 percent, which is 3.5 percent above the 14.0 percent cap,” said the report.

The Interest capping law appears to be doing more harm to consumers than it was previously thought. The negative impact of the introduction of interest rate caps has proved to outweigh its benefits, as credit growth has dipped compared to the pre-rate cap era, as illustrated in the graph below, which shows private sector credit growth over the last 4-years.

See the graph below:

According to the Kenya Bankers Association, loans with a 1-year duration, both secured and unsecured, should attract the maximum chargeable interest of 14.0 percent, but banks have managed to increase the true cost of credit with bank charges varying depending on the bank.

There are various costs associated with a loan in addition to the interest rate component, which ranges from bank fees and charges to third-party costs, such as insurance fees, legal fees, and government levies.

The total cost of credit is therefore defined as all costs related to the issue of credit, including interest and any fees tied to acquiring credit, usually expressed by the Annual Percentage Rate (APR), a metric that factors in additional costs and fees on the annual interest rate.

Moving to analyze the true cost of credit, below we have the ranking of the cheapest and most expensive banks, based on the APR, assuming an individual has taken up a personal secured loan, with the average APR in the sector under this category recorded at 16.7 percent, same as was recorded 6-months ago in July 2017. The two tables below show the Cheapest Banks having an average APR of 15.1 percent (same as in July 2017), with the Most Expensive Banks having an average APR of 18.7 percent (20 bps lower than 18.9% in July 2017)

According to Cytonn, these are the cheapest banks to secure a loan:

The following are the most expensive banks as far as credit is concerned:

Source: Cytonn Investments Limited weekly report