Half of Kenyans ignorant of what it costs to borrow

A newly published report says only about 49.3 per cent of adults know the cost of borrowing.

 More than half of Kenyans do not know the cost of credit, a Central Bank of Kenya (CBK) survey shows, underlining the high risk of exploitation by some naughty lenders or defaults due to shock high lending rates.

A newly published report said only about 49.3 per cent of adults know the cost of borrowing, which is critical in decision-making when taking credit.

This ties to the fact that a majority of Kenyans seek financial advice from informal sources such as family and friends and personal knowledge or experience, with 45 per cent of adults relying on friends and kin for financial advice, according to the CBK survey. Only 2.9 per cent of households sought advice from formal financial institutions in 2021, while 3.6 per cent relied on media and advertising.

“The low number of respondents relying on formal financial institutions raises questions on the quality of financial advice given to consumers and is an indication of the level of financial literacy, where only 49.3 percent of adult respondents reported to have knowledge of cost of borrowing,” CBK said.

Credit seekers

Although banks have since 2014 used the annual percentage rate (APR) pricing mechanism to show borrowers how much their loans will cost —including charges and interest — many credit seekers lack the knowledge to decipher the terms of loans. The new credit pricing strategy followed complaints that banks had ‘hidden charges’ that were only spotted by those with knowledge of how the overall costs are calculated.

The regulator projects lower loan uptake by firms and households in the second half of 2022 as banks set tighter credit terms.

The CBK said although Kenya’s financial sector remains stable and resilient into 2022, supported by sufficient capital and liquidity buffers, there are heightened credit and operational risks that will affect lending.

Cut back on lending

“Tightening of lending standards by banks may increase non-performing loans and reduce credit uptake by firms and households, further undermining recovery and financial sector stability,” CBK said.

Since last September, banks have heavily cut back on lending to individuals and small businesses based on their risk profiles, citing incapability to assess their creditworthiness.