Feature: Banks still preferred for Kenyans seeking loans despite high rates

While seeking to take his two sons to secondary school in Kenya three weeks ago, government worker Fred Anyona scouted in several banks for 3,295 U.S. dollars loan.

Armed with his payslip, Anyona went to the first bank and was informed the interest rate would be 22 percent for the personal loan spread for three years.

At the second financial institution, the interest rate was 20 percent spread for two-and-a-half years, while at the third, 19 percent spread for two years.

"I settled for the third institution because I thought the deal favoured me. However, I knew the interest was too high but I had no choice. My sons, one who had been admitted to a national school, needed about 1,628 dollars," he said on Sunday.

Anyona has already started repaying the loan and he is feeling the pinch. He is among citizens of the East African nation who are grappling with expensive loans as interest rates remain high.

The Kenyans, majority who are working, go for the loans because they are easily accessible as long as one presents his payslip.

"I could not go for Sacco loan because I have two others already, then they would not give me that amount and getting guarantors would have been a challenge," said Anyona, adding that banks remain the preferred choice for Kenyans seeking loans if their balance sheets are anything to go by.

According to the Central Bank of Kenya (CBK), commercial banks gross loans expanded from 18 billion dollars in 2013 to 22 billion dollars last year.

"Comparison of different economic sectors shows that the highest growth in demand for credit was witnessed from personal- household, transport and communication, agriculture and trade sectors," said CBK in a credit survey released early this month.

Gross personal loans during the period increased by 65 percent, an indication that Kenyans were seeking credit from the financial institutions despite the high interest rates.

Latest data from the Kenya National Bureau of Statistics shows that commercial banks' average interest rate stands at 16 percent, down from 18 percent about a year ago. The rate has remained high despite efforts to bring down the cost of borrowing.

A formula named Kenya Banks Reference Rate (KBRR) based on averages of the CBK' indicative rate and the 91-day Treasury bill yield over six months was introduced last year for the financial institutions to use to calculate their loans.

CBK has dropped the KBBR from the introductory 9.13 percent to 8.5 percent, similar as its indicative rate, in bid to encourage banks to lower their rates to about 12 percent, but this is yet to happen.

The result is that Kenyans are defaulting in loan repayments as banks make huge profits at the same time accumulate non-performing loans.

"We take the loans because we need the money and it is easier to get but payment becomes a big challenge. Myself I am servicing one, but I know of a friend who has defaulted and the bank is seeking to sale his land in Busia," said Nairobi businessman Sospeter Arinda.

According to CBK, banks income on loans increased to 2.7 billion dollars, up from 2.3 billion dollars in 2013. Gross non- performing loans stand at over 1.2 billion dollars, noted the CBK, adding that the main reason for the rise in the bad loans was high interest rates.

Kenya Bankers Association CEO Habil Olaka said in a recent interview that Kenyans should not expect loan rates to come down as the aim of KBRR was to help customers compare loans and pick the best lenders.

"The drop of interest rates is a gradual process and may take even years, but I do not see the charges coming down to perhaps a single digit because there is little goodwill from the banks to undertake the move and the CBK is reluctant to enforce the law, "said Olaka.

"Meanwhile, Kenyans would not stop taking loans because the rates are high," said Henry Wandera, an economics lecturer in Nairobi. Endi