Smaller banks are charging higher interest rates on loans to offset the premium they pay to attract deposits, highlighting a funding disadvantage that is increasing borrowing costs for their customers.
Central Bank of Kenya (CBK) data for August shows several small lenders, including Credit Bank and Bank of Africa Kenya, charging loan rates above 17 percent compared with an industry average of 14.34 percent. They were also offering deposit rates of between eight and 11 percent to attract funds.
Fourteen of the 38 commercial banks, mostly smaller lenders, raised their average lending rates in August despite the industry average falling from 14.39 percent in July. This points to divergent pricing trends across lenders even as the Central Bank Rate (CBR) remained unchanged since February.
Credit Bank had the highest average lending rate at 18.69 percent, followed by Bank of Africa Kenya (17.45 percent), Access Bank (17.32 percent), Kingdom Bank at (17.21 percent) and SBM Bank at 17.17 percent.
Some of these lenders were also among those paying the highest deposit rates. Credit Bank offered an average of 11.32 percent, followed by African Banking Corporation (10.84 percent), Kingdom Bank (9.09 percent) and SBM Bank at 8.85 percent.
By contrast, large lenders such as KCB Bank Kenya, Equity Bank Kenya and Co-operative Bank of Kenya charged loan rates closer to the industry average while offering deposit rates ranging from 2.88 percent to 7.40 percent.
KCB Bank Kenya’s average lending rate stood at 14.78 percent in August against a deposit rate of 6.35 percent. Equity Bank Kenya charged 14.9 percent on loans and paid 6.83 percent on deposits, while Co-op Bank’s lending rate was 15.01 percent against a deposit rate of 5.72 percent.
The data highlights the pressure smaller lenders face in mobilising relatively cheaper deposits, forcing them to either absorb higher funding costs or pass part of the expense to borrowers through higher loan rates.
However, the higher lending rates have helped some smaller banks maintain lending-deposit spreads at levels comparable with or above those of larger rivals.
UBA Kenya, for instance, had one of the widest spreads in August, with an average lending rate of 15.81 percent against a deposit rate of 4.41 percent -a difference of 11.40 percentage points.
Access Bank had a spread of 9.77 percentage points, while Bank of Africa Kenya had a 10.1 percentage-point spread. Kingdom Bank and SBM Bank recorded spreads of 8.12 and 8.32 percentage points, respectively.
Credit Bank’s spread was narrower at 7.37 percentage points as the lender offered the highest average deposit rate in the market at 11.32 percent.
Smaller lenders generally have fewer large corporate and institutional accounts and smaller customer networks, increasing competition for deposits. The need to offer attractive returns raises their cost of funds and makes it harder to compete with larger banks on loan pricing.
Large banks, meanwhile, benefit from more diversified and relatively stable funding sources, including corporate and institutional deposits and wider retail customer bases.
The differences in deposit and lending rates show that the easing in the overall cost of credit is not being felt evenly across the banking sector.
CBK cut the CBR from nine percent to 8.75 percent in February and has kept it unchanged since then. The Monetary Policy Committee is set to meet on Wednesday, with the Kenya Bankers Association (KBA) calling for the rate to be maintained, citing relatively stable inflation and exchange rates and continued growth in private sector credit.
‘We view that maintaining the current stance of monetary policy in keeping the CBR unchanged at 8.75 percent would be appropriate to support the ongoing private sector credit growth and sustain economic activity,’ said KBA.
The average lending-deposit spread narrowed to 7.43 percentage points in August from 7.46 percentage points in July, masking the much wider differences between individual lenders.