Pressure on banks to raise fees as rate cap takes a toll (Kenya)

By Brian Ngugi | Business Daily, Kenya September 11, 2017

Commercial banks are under pressure to introduce new chargeable services or raise fees on existing offerings in the wake of interest rate caps, analysts say.

Standard Investment Bank (SIB) says in a new report that lenders underpriced transactions before the introduction of interest rate controls when they relied more on the lending business, which is now less profitable.

“In our view, capping of rates highlights weak pricing models for non-interest revenue –in the past banks were able to subsidise non-funded services via lending rates,” SIB said in the report.

“This is no longer the case and banks now have to unearth new chargeable services or ways of differentiating their services to be able to charge premium fees,” the report reads.

Some banks have sought to re-price their charges upwards in the wake of the rate caps only to be met with regulatory resistance, putting them in a bind.

Significant Increase

The Central Bank of Kenya (CBK) recently announced it rejected 13 requests by banks to raise transaction fees.

The commercial banks previously focused on the lending 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.

Banks are, however, now looking at commissions and fees as profit boosters, with a significant increase in these revenue lines likely to mitigate the impact of narrowed lending margins.

Only a few banks have seen transaction-based income exceed net interest earnings, signalling the difficulty of switching from lending as the driver of earnings.

Non-interest Income

Commercial Bank of Africa (CBA) is the only large bank whose non-interest income surpassed net interest income by Sh1 billion in the half year ended June.

Similar feats were reported by Bank of Africa (Sh566.1 million) and Jamii Bora Bank (Sh10.3 million).

It remains to be seen whether the CBK will allow banks to raise charges on existing services.

Lenders are meanwhile pushing for adoption of digital banking to offer services at lower costs compared to brick-and-mortar branches.

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