BANKS SHOULD NOT OVERCHARGE ON LOANS

Banks should not overcharge on loans
BY JACKSON OKOTH
Commercial banks have adjusted their base lendiong rates in response to actions by Central Bank of Kenya(CBK) tighten supply of cash available for circulation.
But while banks have to make profit, it is unreasonable for them to charge as much as 25-30 per cent per cent for loans, a spread of more than 10 per cent.
This is not only exploitative but also unreasonably high given the financial strain most households and businesses are under.
Banks should realise that their customers are part of the business models. It does not make good business judgement to pushing clients to the wall each time CBK tightens purse strings only to return and hawk cheap credit when the conditions change.
Although Central Bank of Kenya has licensed several credit reference bureaus, it appears that banks are yet to use these facilities.
Official data from the Central Bank Kenya indicates that spreads on commercial bank loans have remained above 10 per cent throughout the year, reflecting high risk perception by banks.
Market data also indicates that most banks consider the risk of loan default to be the highest at the bottom of the market and for short term loans.
With commercial banks increasing their lending rates, the unfolding scenario will be that of high default rates and customers lose their property to auctionners and debt collectors.
Perhaps, this is the time for borrowers to seek for alternative sources for loans such as savings and credit co-operative societies(SACCOs). This is until the situation in the banking industry gets back to normal.
At the moment, Savings and Credit Co-operative Societies(SACCOs) are charging an average interest rate of 12 per cent on a reducing balance compared to a high of 25-30 per cent for commercial bank loans.
A key indicator of financial performance and efficiency is the spread between lending and deposit rates. If this spread is large, it works as an impediment to the expansion and development of financial intermediation.
While commercial banks are charging between 19 and 30 per cent for loans, depending on a customer’s risk profile, banks pay a paltry 2-3 per cent for deposits. This rates not only discourage potential savers due to low returns on deposits but also limits financing for potential borrowers.
When banks push the cost of credit beyond ordinary borrowers, this scenario not only affects level of investment in the economy and also slows down its growth.
At a time when this economy is battling negative effects of drougt, a weak Kenya Shilling and high oil prices, the last thing one needs if expensive credit.
Commercial banks have for long used the excuse that lending to individuals is a risky venture to push up their lending rates. However, we know that the banking industry is riddled with inefficiencies and high operating costs.
There is also lack of competition in the sector, the entire credit market controlled by four of five large commercial banks.
Matters for the financial sector are made worse by a CBK whose monetary policy stance is at the whim and beckon of the International Monetary Fund(IMF). It does not reflect well on the Moneraty Policy Committee(MPC) atop policy organ of the CBK to move only when pushed by the IMF.
As a regulator, CBK shoull come up with a rule on the level that banks can charge above the Central Bank Rate(CBR), to safeguard the interest of consumers. Allowing commercial banks to adjust their lending rates without any form of guidelines is not only irresponsible but also a careless attitude from an institution that is supposed to act as the public’s watch dog.
It is not fair for CBK to leave customers at the mercy of banks, who will go ahead and sell off propertiers when the number of defaulters increase on the loan book.
To narrow interest rate spread, it is important to maintain a stable macroeconomic environment and thus reduce credit risks.
There is also a need to minimize implicit taxes like reserve and cash ratios, accompanied by fiscal discipline to reduce the demand for financing budget deficit with low-cost funds.
Banks should perform more intermediation/screening functions than simply investing in Treasury bills each time the CBK pushed up the CBR, cash reserve or any other moneraty tool.