NAIROBI (Xinhua) --
Kenyans are still grappling with high loan
charges more than two years since the east African nation
introduced caps on banks’ lending interest rates.
passed by the parliament capped interest rates at four
percentage points above the central bank’s benchmark rate, which
currently stands at 9 percent.
The central bank on Jan. 28 retained the benchmark lending
rate at 9 percent, citing a good macroeconomic environment where
inflation is on downward trend and the Kenyan shilling is stable
against major world currencies.
While this was the umpteenth time the central bank was
retaining the rate at the level signaling cheaper credit, the
cost of loans in the country remains high.
Some banks are charging up to 26 percent per annum for loans,
nearly double the recommended 13 percent, having added their
The charges added include cost of disbursement, appraisal,
legal and insurance fees.
A website that guides consumers on the cost of credit by
various banks run by the Kenya Bankers Association (KBA)
revealed on Friday that if one takes a one-year loan of 500,000
shillings (5,000 U.S. dollars) from one of the Kenyan banks,
they would part with monthly payment of 440 dollars and pay 387
dollars in interest and fees, or an equivallent of 26 percent of
For a mortgage of 60,000 dollars to be repaid in five years,
one parts with interest of 20,000 dollars at a 20.3 percent
"I have witnessed a small difference in my monthly mortgage
charges since the implementation of the interest caps," said
Fidelis Waina, an employee of a telecom firm in Nairobi.
Waina bought a three-bedroom house on mortgage in Kitengela
on the outskirts of Nairobi.
This is the fifth year he is paying the loan and he has about
eight more years to go.
"When the capping of interest rates took effect in September
2016, I am among Kenyans who celebrated but this did not
translate to cheaper loans," said Waina, noting he pays the loan
at annual rate of 16 percent, 3 percent above what the law
Banks are blaming the situation that has seen the charging of
higher fees on costs and risks associated with borrowing,
according to Habil Olaka, the KBA chief executive.
The costs range from bank fees and charges to third-party
charges such as legal fees, insurance and government levies.
The KBA notes that loan applicants tend to focus only on the
interest rate when making a loan decision, but there are other
direct costs associated with borrowing that raise charges.
In a survey last year, the Central Bank of Kenya noted that
some banks exploited the existing approval limits to increase
fees on loans to offset loss in interest income.
And as small businesses suffer from loan drought, what the
central bank has not captured is that the rates have pushed
borrowers to expensive digital lenders.
There has been an upsurge in the number of digital lenders in
the last two years as operators cash in.
The lenders charge up to 15 percent one-off interest rate on
loans, making their services the most expensive as borrowers end
up paying a 300 percent interest rate if they borrow every month
and up to 720 percent interest rate if they do it weekly.
According to the International Growth Center, the rate cap
law did not enhance transparency by financial institutions but
assumed that interest rate caps as a policy tool will adequately
address some of the key market failures.
Banks have thus responded by re-orientating their charges
toward fees to make up the difference.
This has been bad for consumers.