Banks Making Billions from Depositors but What is the Return for Customers?

Since the implementation of the interest capping law, Kenyan banks have been complaining of the negative impact that the law has had on the business.

Talks are still underway as to whether the interest capping law should be done away with or be amended after the government’s admission that the law is unsustainable.

With the complaints from the banks, one would expect banks to have been making huge losses at the end of every quarter, half of the financial year, but that has not been the case for 99 percent of commercial banks in Kenya.

Even as the debate to either do away with or amend the interest capping law goes on, it has emerged that commercial banks have been making billions in terms of interests from depositors.

Data from the Central Bank of Kenya (CBK) indicate that the interest expense for banks dropped by 7 billion shillings. This is despite the increase in customer deposits by more than 300 billion shillings from 2.6 trillion shillings to 2.9 trillion shillings.

When the interest capping law was enacted, it was expected that depositors in commercial banks will earn higher interest rates. The fact that deposits increased and the interest payouts dropped significantly means the depositors have been in for a raw deal.

According to the data from CBK, the rise in customer deposits by 11 percent does not replicate in interest paid by the banks following the law that required them to pay an interest rate of 70 percent of the Central Bank Rate on term deposits.

After the law, many Kenyans rushed to the banks, especially in 2017, to deposit cash with the hope of earning hefty interests from it leading to an additional 300 billion shillings in terms of deposits. With this in mind, the interest paid by the banks was to rise but instead, it dropped from 113.2 billion shillings to 106.4 billion shillings.

During the period, most customers took off from microfinance banks and headed to ‘big banks’ with their deposits with the hope of benefiting from the improved rates. Deposits in microfinance banks dropped by 3.2 percent.