Kenyans have in recent times become cozy with taking up mobile loans pushing banks to join the mobile platform to beat the competition.
The procedure of taking up a bank loan in Kenya is not complicated and is similar irrespective of the type of bank you approach.
There are three common types of loans in Kenya:
There are a number of factors to consider when choosing which institution to take up a loan from other than the obvious one which is interest.
Banks and other financial institutions vary in strengths and the best to go for loans may not necessarily be the best to reach out for your asset financing. Unlike loans that are synonymous with most Kenyans asset financing which comes in form of a loan to enable you to purchase an asset that could, for example, be a vehicle, piece of land or an apartment.
A majority of Kenyans survive on a hand to mouth basis and whenever any other need arise loans is the only way to navigate through the financial need.
To apply for a loan in any Kenyan bank, you must meet the following criteria.
To secure a loan with a Kenyan bank, it takes around one week while it could take a day or a few hours to secure a soft loan.
To secure an unsecured loan with a Kenyan bank, it takes around 3 days but could be sooner if it is an emergency loan.
The Central Bank of Kenya (CBK) has continued to retain the benchmark lending rate at 9 percent meaning banks in the country can only give loans with a maximum interest rate of 13-14 percent.
The Banking Act caps lending rates at 4 percentage points above the CBK rate bringing down initial interest rates from what was initially viewed as exorbitant lending rates. Loans are no longer as expensive despite a number of banks not being so strict with the CBK cap rate. Below is a look Interest Rates on Personal Loans from a number of Kenyan Banks.
Banks considered to the best lenders also include Standard Chartered Bank, NIC Bank, CFC Stanbic and I&M bank.
The Kenya Bankers Association’s (KBA) credit report mid-2018 indicated that big banks, in terms of assets and customer base, offered borrowers the most expensive loans despite incurring the lowest cost of funds compared to the smaller banks.
The report termed loans from Barclays Bank of Kenya, Equity Group and NIC Bank as expensive with the highest total cost of credit, while banks like Victoria and Guaranty Trust Bank (GTB) whom little is known of were reported to be offering the cheapest loans.
The report was based on a tabulation of how much it would cost a borrower to repay a 1 million shilling unsecured loan over a period of 12 months. The data revealed that the higher costs arose from non-interest charges such as processing fees on the loans.
A loan of 1 million shilling from Barclays bank would cost one 135,245 shillings which would include 57,800 shillings which is the borrowing fee and is 42 percent of the total cost of credit.
Equity Bank would offer the same 1 million shillings loan for 132,445 shillings which would include 55,000 shillings of the non-interest borrower’s fee.
NIC would charge 121,445 shillings for the same one million shilling loan and include a non-interest borrower’s fee of 44,000 shillings.
Victoria Bank, which is the cheapest of the 32 lenders in the KBA 2018 database, a one million shilling loan would cost 77,445 shilling. Victoria charges no other fees on the loans other than interest prescribed by law.
The KBA data reflects lending tactics that the small banks use to create a larger clientele base. Kenyans should hence also consider what the small banks have to offer for more affordable loans.
Banks too are weary of making losses and not repaying a borrowed loan on time could get you not just blacklisted by the CRB but also auctioned.
The bank’s credit analyst assesses the likelihood of a full repayment as stipulated in the contract in a process called risk analysis.
Risk analysis includes evaluating actual facts about the customer, bank position and policy, as well as ‘gut feeling’ or intuition aspects, which the analyst will consider based on experience. A borrower with a poor credit record is likely not to get a loan.
For a commercial or a business loan, the credit analyst will be directed by business financials like the balance sheet and income statement to determine repayment ability and the business’s stake which is evaluating the risk being taken up by the business versus the lender.
The credit analyst will also evaluate how the loan could affect the bank’s profits and losses to decide if the interest earned on the facility equals or exceeds the risk undertaken by the bank is by giving out the loan. The bank will finally evaluate if the loan is in order with the bank’s policies and CBK’s prudential guidelines.
Short-term loans are expensive! Shorter-term loans allow banks to increase the rate of fees that appear once on long-term credit facilities.
For a month loan of 100,000 from the Equity bank, for example, one will have to part with 5,000 shillings which raises the charge to 6,667 shillings where only 17.5 percent of the amount is interest.
A majority of the banks reacted to CBK’s September 2016 move to capping the interest rate to 14 percent by reducing the loan repayment period for a majority of the mobile borrowers.
The KBA data reveals that most borrowers prioritize ease of getting the credit than the interest they would incur most likely because at the point of need it is urgent. The CBK seems to have noticed this and has tamed banks from exploiting Kenyans at their point of vulnerability.
A loan does not have to scare you as long as you have a strategized plan of how to service it TIMELY.