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Cheaper loans elude most Kenyans despite interest rate caps

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.

A law 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 charges.

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 the principal.

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 rate.

"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 prescribes.

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.



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