This archive report was first published on 2 December 2019.
Banks Pay Lowest Rates on Savings in 36 Months ¶
Kenyan banks have been paying the lowest deposit rates in 36 months, with the average savings interest falling to 4.58 percent in September.
The removal of the floor interest rate last year has seen lenders ride on cheap deposits to grow record profits, according to Central Bank of Kenya (CBK) data.
Customers have lost Sh1.75 for every Sh100 in their savings accounts since the law was changed, with interest paid on large deposits from cash-rich firms such as Safaricom dropping to 6.98 percent in September from a peak of 8.26 percent in January last year.
Most banks have set a threshold below which they take deposits for free, resulting in the bulk of savings accounts not earning interest.
Slashing interest expenses saved the lenders hundreds of millions of shillings, reducing the interest earnings by companies and individuals with large piles of cash in their bank accounts.
"Interest expenses have fallen due to a mix of factors. The removal of the floor for deposit rates led to a re-pricing of some saving accounts. There is also prudent management of liabilities," said John Gachora, the chief executive of NCBA Group.
The removal of the floor on deposit rates happened in September last year, while the cap in lending was removed on November 7, allowing banks to review the cost of new loans depending on the risk posed by the respective borrowers.
Low deposit rates widened the interest spread – the difference between borrowing and lending rates — to 7.89 per cent in September from 6.33 per cent in a similar period last year, giving banks larger margins to drive profits.
Patrick Mumu, an analyst at investment bank Genghis Capital, said the bigger banks have benefited most from the falling deposit rates, helped in part by the flight of wealthy depositors from smaller lenders.
CBK data shows that small banks controlled 21.15 percent of the number of Kenyans with more than Sh100,000 as savings last year, from 34.73 percent in 2016 when three troubled lenders were placed under receivership.
