- Fall in savings return linked to removal of the floor on deposit interest rate.
- The bulk of savings accounts do not earn interest because most banks have set a threshold below which they take the deposits for free.
- Slashing interest expenses saved the lenders hundreds of millions of shillings, thus reducing the interest earnings by companies and individuals with large piles of cash in their bank accounts.
The deposit rates offered by Kenyan banks have hit a 36-month low, reflecting the ongoing impact of the removal of the floor interest rate last year that has seen lenders ride on cheap deposits to grow record profits.
Central Bank of Kenya (CBK) data shows that the average savings interest fell to 4.58 percent in September compared to 6.33 percent in the same month last year when Parliament made changes to the banking law and removed a clause compelling banks to pay depositors at least 70 percent of base lending rate. This means customers have lost Sh1.75 for every Sh100 in their savings accounts since the law was changed.
Interest paid on large deposits from cash-rich firms such as Safaricom #ticker:SCOM, which usually have room to negotiate higher rates, on average dropped to 6.98 percent in September from a peak of 8.26 percent in January last year.
The bulk of savings accounts do not earn interest because most banks have set a threshold below which they take the deposits for free.
Slashing interest expenses saved the lenders hundreds of millions of shillings, thus reducing the interest earnings by companies and individuals with large piles of cash in their bank accounts. This trend reflects in the earnings reported by the top six banks that managed to grow their deposits by 11 percent or Sh218 billion to Sh2.22 trillion in the nine months to September. Despite this growth, the lenders’ interest expenses on savings fell by 0.4 percent to Sh47.95 billion. This is a pointer that banks have also deepened the shift of customer deposits to current or transactional accounts that do not earn interest, a tactic they first adopted after September 2016 when Kenya imposed legal control on lending and savings rates.
"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 #ticker:NIC.
The caps compelled lenders not to charge their customers more than 400 basis points above the Central Bank rate, which stands at 8.5 percent now, and to offer a minimum deposit rate of 70 percent of the Central Bank rate. This means banks would be paying at least 5.95 percent on deposits and lending at a maximum of 12.5 percent per annum.
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 the review cost of new loans depending on the risk posed by the respective borrowers. Last week, CBK reminded banks that the removal of the cap does not affect existing loans.
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. As a result, low deposit rates helped all the top-tier banks, except Barclays Bank, to lower their cost of funds. Those that gained include KCB #ticker:KCB, Equity Holdings #ticker:EQTY, Co-operative Bank #ticker:COOP, Standard Chartered #ticker:SCBK and NCBA —all which slashed the cost they paid for every Sh100 in their deposits.