At the heart of Kenyan banks’ fight against Parliament’s fourth attempt to cap interest rates is the reality that profitability could take a dip in line with the shrink in the spread between interest paid to depositors and the one earned on loans.
Interest rates were under government control until the 1990s when the economy was liberalised. In the various press conferences the Kenya Bankers Association has held since Parliament passed the bill to cap interest rates, the lobby has insisted that cost of funds will increase unfairly. But not everyone is buying the bankers story.
“Bankers are operating from a misguided fear that their profits will take a hit as interest rate spread thins,” says managing consultant at Interest Rates Advisory Centre, Wilfred Onono.
He told People Daily banks should be making money from the volumes of loans they give instead of relying on the huge spread between deposit and loan interest. In the five months to May, lending rates averaged 17.93 per cent while interest on customer funds averaged 7.1 per cent for fixed deposits and 1.46 per cent for savings deposits.
This means that for Sh100 from a fixed deposit customer that a bank lent out, it made Sh17.93. Of this Sh17.93, the bank gave the customer Sh7.1 and retained Sh10.83.
The spread is bigger if the Sh100 is from a normal savings account customer. In this case, the bank will give the customer Sh1.46 and retain Sh16.48.
Were the new bill to become law, the spread between what the banks charge their credit customers and what they pay their depositors would change drastically. The bill requires that banks do not charge more than four per cent above the base lending rate and not pay less than 70 per cent of the base rate on deposits.
With the current base rate, the Kenya Banks Reference Rate, at 8.97 per cent, the highest interest the bank could charge on credit would be 12.97 per cent while the lowest interest on deposits would be 6.27 per cent.
“This is a reasonable spread. In other parts of the world, the spread is thinner and banks still make money,” said Onono. “In the 1980s and 1990s when the Central Bank directly controlled interest rates, the banks had a spread of just four per cent between deposit interest and credit interest. They were very profitable,” he said.
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