How banks are beating rate cap

The top eight commercial banks income from commissions and fees surged eight per cent or the equivalent of Sh4.86 billion last year.

This was reported even as lenders sought to boost profits through fees and charges on consumer products and transactions to beat the rate cap law, which has seen their interest income margins thin.

A review of the top lenders’ financial statements for the year ended December 31, 2017 shows that the eight Kenyan banks earned Sh68 billion in the period from Sh63.1 billion during a similar period the previous year.

Experts have in the recent past pointed out that banks have been turning to commissions and fees as profit boosters, with a significant increase in these revenue lines likely to mitigate the impact of narrowed lending margins.

Despite a push by the banking regulator to infuse transparency in financial sector pricing, a study released last year by the Financial Sector Deepening (FSD) Kenya raised the red flag over hidden costs charged by banks to unsuspecting consumers.

Commercial banks were on October 2016 ordered by the Central Bank of Kenya (CBK) to immediately stop charging their customers any new levies following the coming into force of a new law putting a ceiling to interest rates charges.

In 2016, Kenya capped commercial lending rates at four percentage points above the Central Bank Rate, and set a minimum deposit rate, squeezing profit margins for banks.

These have seen banks come under pressure to rely more heavily on fees, commissions and other charges to achieve the soaring earnings growth and dividends they previously enjoyed and that shareholders expect.

Some lenders have introduced new chargeable services or raised fees on existing products in the wake of interest rate caps. At nearly Sh5 billion, the cash made by banks in service charges is enough to set up two cancer centres, under the Health ministry’s roadmap to the killer’s control in Kenya.

Banks charge fees from account-related charges to customers. Charges that generate fee income include non-sufficient funds, overdraft charges, late fees, over-the-limit fees, wire transfer charges, monthly service charges, account maintenance fees (ledger fees), obtaining account statements, as well as ATM withdrawals.

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Lenders previously focused on the loans business, which generated the bulk of their profits, with fees on transactions lowered or maintained for years in a bid to attract and retain customers.

A review of the top lenders financial statements for their Kenya business shows income from fees and commissions for CFC Stanbic surged 38.6 per cent or Sh984 million to Sh3.5 billion in the review period from Sh2.5 billion a year earlier.

KCB #ticker:KCB , which is Kenya’s largest bank by assets went up 16.4 per cent or equivalent of Sh2 billion to Sh14.6 billion in the review period from Sh12.6 billion a year earlier.

Equity Bank #ticker:EQTY , which is the biggest lender by customers in Kenya, saw its income from fees and commissions go up 11 per cent or Sh1.94 billion to Sh19.2 billion in the period from Sh1.3 billion.

Diamond Trust Bank (DTB) #ticker:DTBK saw its income from fees and commission rise by 5.35 per cent or Sh165 million to Sh3.2 billion from Sh3 billion a year earlier.

Commercial Bank of Africa (CBA) saw its earnings from fees and commissions grow two per cent or Sh154 million to Sh7.66 billion from Sh7.51 billion a year earlier.

Standard Chartered Bank Kenya #ticker:SCBK (Stanchart) recorded a 0.43 per cent or Sh19 million rise in income from fees and commissions to Sh4.53 billion from Sh4.51 billion a year earlier.

Co-operative Bank of Kenya (Co-op Bank) saw its income from fees and commission rise by a marginal 0.29 per cent or Sh27 million to Sh9.8 billion from Sh9.79 billion.

Barclays Bank of Kenya #ticker:BBK (BBK), however, recorded an 8 per cent drop in income from its fees and commissions to Sh5.2 billion from a year Sh5.77 billion a year earlier.

The FSD report found that banks in the study period were filing disclosures that fail to fully respect the tariff situation.

“Although banks are required by the Central Bank of Kenya (CBK) to publish “tariff guides” with all their fees and charges, the FSD study found that many were either outdated, incomplete or lacking account specific information,” said the FSD in the study whose findings put the regulator on the spot for failing to protect consumers.

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“Despite visiting over 30 bank branches and consulting tariff guides, customer care representatives, bank websites, enquiring from colleagues and friends, over several weeks in 2015 and 2016, we still could not get consistent pricing information,” said FSD in the study.

The report outlined the findings from a two-year study by FSD Kenya, a UK-funded NGO, to understand the costs for banking services in Kenya.

It said two rounds of mystery shopping surveys were completed in October and November of 2015 and 2016 to build a database and measure the costs for basic bundles of transactions such as opening, running and closing bank accounts.

While conducting the study, however, the report said it became clear that bank pricing data is difficult to obtain and that market information is still opaque. CBK director in charge of Bank Supervision Gerald Nyaoma said in a circular to chief executives of commercial banks and mortgage finance companies last year that the regulator had at the time received numerous applications from banking institutions seeking approval to increase charges on products.

Mr Nyaoma said at the time that the CBK has received mounting complaints over introduction of new arbitrary charges since the Banking (Amendment) Act 2016 came into force on September 14 2016, whose effect is to nullify any gains to customers of the law capping interest rates.

“The CBK has also received a number of complaints from bank customers stating that their banks have imposed arbitrary charges or unilaterally converted their savings accounts into transactional accounts, and thereby losing the benefits that were accruing from their savings accounts,” Mr Nyaoma said then in the circular.

The Consumers Federation of Kenya (Cofek), last year faulted the CBK for failing to immediately crack the whip on rogue lenders, which were adding illegal charges on unsuspecting customers.

“The Central Bank of Kenya has no business reminding people to follow the law. It has a business to crack the whip. What we expected from Central Bank was that Bank “X” or “Y” is not doing this and these are the sanctions or that they show cause why this should not be done,” said Cofek secretary- general Stephen Mutoro in an interview earlier adding that the CBK’s message is akin to reminding the banks not to be caught pants down.

To collect data for the FSD study, researchers visited multiple bank branches posing as clients, as well as customer service call-lines and web searches to collate data.

The researchers said some information was difficult to obtain and validate, even from different branches of the same bank.

“While some charges are straightforward, such as ATM withdrawals costs, others are surprisingly difficult to obtain.”

It noted many branches displayed outdated tariff guides and complex pricing structures that even the frontline bank staff are not familiar with.

“The mystery shopper exercise mirrored a typical customer’s journey, with most customers obtaining information on banking from branches. The inability to obtain consistent information over several weeks of data collection reflects a transparency issue in the market.”

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