Bankers: Robbers or Businessmen, or both?

There was a story in the press a few weeks back about [well I don’t know how to describe him but here goes] a English fella who was knighted some years ago for his services to the banking industry. He was a former CEO of one of the biggest banks in the UK and had worked in banking prior to that (since like ’95) but the funny thing is that he applied for a super-injunction in a British court to prevent the press from referring to him as a b*nker… no s**t, like really? Clearly since the global financial crisis, that was mostly blamed on the b*nkers, it seems that it’s a bit unfashionable in the West to proclaim oneself as a b*nker.

Over here, methinks it’s still a respectable profession and the institutions themselves are highly regarded. Be that as it may, there are a few tendencies by our banks that are straight up unfair.

First off, its been a good financial year (once again) for our banks, the profits have been in the billions or hundreds or millions for most of them, National Bank of Kenya actually even announced a dividend for the first time since the 90’s (hand-claps!!). The financial sector is now actually one of the biggest drivers of our GDP, right up there with agriculture and construction (more handclaps!!!).

That’s the good.

Now for the ugly. Despite the best efforts of Prof. Ndung’u and the good people of the Central Bank of Kenya (CBK), the banks just won’t take their interests rates down. The CBK has lowered the Central Bank Rate (CBR) several times over the past two years but the banks have been slow to match those cuts with corresponding cuts to their lending rates. This runs contrary to banking practice globally, be it the Fed, the Bank of England, the SARB and commercial banks in their respective countries adjust their rates in line with the monetary policy that their Central Banks try to pursue.

Clearly, Prof. Ndung’u has been attempting a loose monetary policy the last few years to stimulate the economy back to them days of 7% GDP growth. To do this the banks are having to/have had to play ball; reduced interest rates on loans assists almost all sectors of the economy but it seems that the banks have laughed at each CBR reduction. What’s more f**ked up about all this is that the deposit interests that banks now offer has hit a 5 year low. Banks now offer us an average interest rate of 1.25% per month to bank with them. At a time when inflation for the month of March was 9%, you’re better off putting your cash under a mattress [you can be sure with the bank charges and fees that 1.25% amounts to zip zero].

So in other words when the banks borrow money from CBK they’re charged interest at 6%, when they borrow from us they pay us interest of 1.25% per month and when we come borrow money from them, they charge us 13-15% [f**kin’ ridiculous!]…

To be fair to banks, their excuses they are making seem quite valid. According to them, the cost of doing business in Kenya is too high therefore a lot more goes into setting their interest rates than what it costs for them to obtain the cash. This kind of makes sense and ofcourse an area they loove attacking is the justice system…their legal suits to recover cash from bad debtors sometimes get bogged down in court for over 10 years-so that’s a double expense- the bad debt itself and the legal fees.

Despite this and many other extra costs of business in Kenya, it’s beyond doubt that banks occupy a special position in society and maximising on profit making should not be their sole maximising. Banks fuel most economies (fortunately or unfortunately), the more they lend, the more money is available to farmers, the construction industry, manufacturing, textiles, households, you name it… What is needed here is a bit of innovation, i.e a way for banks to keep making profits but still open up banking services to more Kenyans (both deposits and loans). Speaking of innovation (or lack of it), it’s interesting that a significant proportion of Kenyan banks’ profits are from Treasury Bonds and Bills—so banks basically just invest their cash in the fairly risk free market of government bonds and wait for the guaranteed income from the interest—any idiot can do that… What these people need to do is try to get that middle and lower income market who prefer to borrow from chamas and micro-finance institutions, surely an actuary can help them figure out a way to grab this market and be profitable? The sad thing is that bankers are now losing out to telephone companies (mpesa), chamas and micro finance companies. They’d rather lose that ordinary Kenyan to those groups, borrow cheap and charge high interest for those can can afford it and buy treasury bonds and bills… WAKE UP!!

8 thoughts on “Bankers: Robbers or Businessmen, or both?

  1. The thing about being an Actuary in Kenya is that banks consider you as a too great a liability to hire. Banks would rather play a sure thing (as with t-bills and bonds) rather than spend money on Actuaries to benefit them and others. Secondly, banks in Kenya (and abroad too, generally) are either owned or run by a small group of people who consider themselves a cadre or two above the masses and whatever interest the masses have. They can have laws changed to suit them, policies meant to protect investors ignored (as was the case in the recent market crash) and basically do anything and get away with it. i feel like this post should mention that the documentary, inside job, is a must watch for anyone who has money or is intending to deal in money.

  2. Nice piece. Interest is only one component of a banks income. The other which has been set aside is the cost of operating accounts from counter charges to banker’s cheques etc. and these (non-interest) items account for 20 – 60% of a bank’s total income. Also several banks have made a handsome profit investing customer deposits in (risk free) government bonds

  3. nice one dude,
    we have similar issues here in TZ, banks here are basically legal loan sharks, if you are not a bank employeee interest on a loan starts 17% (bloody ridiculous) as if that is not enough the loan agreement usually gives the bank the right to vary the terms of the loan unilaterally and there is no requirement for this to be reasonable, so basically they can call up the loan immediately or double the interest rate.
    and yeah we have bad customer service and they ask for ridiculous things for you to open a bank account (although i suspect that this might be peculiar to tanzania)

    its really tragic that the banks are like this bcoz the inefficiencies are transferred to the wider economy. When you think that the role of banks is to be an intermediary between the people who have money and those who have ideas but need money to implement, you realise that if we had a more efficient financial sector we could be an innovative economy, *sigh*

  4. Very very nice article! In a language that i understand. Now i see the conniving ways of the banks. Feed us with more like pieces.
    Well Tarama’s comment above shows that the grass aint greener on the other side. That said, we young people who are now enlightened are moving; moving to Saccos et al. 1% INTEREST PAYABLE IN 48 MONTHS. Why would i want to go to a Kenyan comnmercial bank as a young struggling enterpreneur/professional

  5. The whole thing with bank employees getting lower rates might contribute to our problems. Until the market is competitive enough, perhaps we could have legislation that makes it illegal for banks to engage in price discrimination. E.g., banks could be prohibited from lending to employees at rates that are x basis points below their base lending rates. Yeah, this might rouse those bankers!! For as long as bankers enjoy credit facilities that significantly improve their disposable income, those rates aren’t coming down soon baby!! Fancy how they finance their lives with their customers’ deposits. Gouging isn’t right.

  6. Interesting article…am wondering what would be an effective way to set up a system that would make accountability for loans and enforced repayment possible without having to wait eternity to overhaul the justice system.

  7. ..It is often forgotten that banks are businesses like any other and focus on similar issues. It is a simple process that begins with the collection of information on the business from the customer. The better the quality and the level of the information that is collected at this early stage the more the likelihood that the credit process will result in a successful outcome…It is important to remember that the relationship manager the customer has contact with is their advocate within the bank – so the better the information they have the easier it will be for them to put together an application for lending.

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