KBA CEO CHAT - Industry Proposals on Reducing the Cost of Credit

CEO | Dhiren Rana, Middle East Bank Kenya Ltd, Managing Director
MONTH | September 2014
nuru mugambi
good morning all...looking forward to today's chat
nuru mugambi
hi conrad :)
Chat Admin
Welcome everyone to the first of three exciting chats relating the drivers of the cost of credit
Chat Admin
This morning we will be discussing the banking industry proposals on reducing the cost of credit.
Chat Admin
Our host today is Mr Dhiren Rana CEO of Middle East Bank who will be joining us at 10am
Conrad Karume
Hi Nuru, Glad to join in the chat.
Chat Admin
We encourage you to participate in the discussion
Simon Lee
Morning all. looking forward to an informative discussion
John Komu
Good morning good people..
Chat Admin
As we wait for the chat to start at 10, we encourage you to upload a photo and update your profile.
Chat Admin
We would like to welcome Mr Dhiren Rana to the Chat Session
Dhiren Rana
I wish to welcome everybody on behalf of Kenya Bankers Association
Dhiren Rana
Today we will discuss the Total Cost of Credit...the annual percentage rate or APR...and the KBRR, or the Kenya Banks Reference Rate
Dhiren Rana
Moreover, we will also interact to discuss what banks in Kenya are doing to enhance access to credit and to reduce the interest rate
Dhiren Rana
I look forward to an interactive session
Zena Rashid
Welcome Mr. Rana
Dhiren Rana
if you do not know technicalities about APR and KBRR please do not worry because I am here to clarify and demystify these terms
Dhiren Rana
Welcome Zena...great to have you here
Chat Admin
Thank you Mr Rana for those words of introduction. We now welcome questions from those logged in.
Dhiren Rana
Let me share some thoughts as your observations come up
Dhiren Rana
It is encouraging to note that credit to small and medium sized enterprises has grown by 40 percent in the last one year...
Dhiren Rana
...banks in kenya principally focus on serving SMEs and individuals and families for their financial planning needs.
Dhiren Rana
This is really to encourage all the participants in todays discussion to seek access to banking facilities in kenya without hesitation...it is for this reason that we host the CEO Chat...so as to have an interactive engagement and give you an opportunity to share your thoughts on how you think the banking industry will continue serving you
Mbatia James
I salute you all
Dhiren Rana
The growth of the economy comes through increased activity countrywide, and SMEs are very important players in generation of economic activity and that is the reason why banks as service providers are focusing on SMEs
Dhiren Rana
therefore...cost of credit and interest rate are key concerns to consumers, businesses/SMEs...as well as banks
Dhiren Rana
Welcome Mbatia James
Dhiren Rana
Greetings to you!
CHRISTINE VULIMU
Glad to be part of this dicussion
Dhiren Rana
Since the introduction of the total cost of credit initiatives...most recently the APR and KBRR, there has been a huge public interest on how it will positively affect their access to banking services
Dhiren Rana
these initiatives became operational from 1st July 2014...
Dhiren Rana
although it is still early days...within the short period that these initiatives have been in place...we are already seeing strides in so far as transparency around pricing and a response in terms of credit uptake
KIBET LANGAT
On the growth and development of SME's, are there sectors of our economy that you consider "unbankable"? The development gap has been rather slow.
Dhiren Rana
banks are also trying to promote awareness amongst their clients regarding these initiatives
Dhiren Rana
Kibet...morning...
KIBET LANGAT
Good morning sir
Dhiren Rana
...i do not think that there are sectors within SMEs that we consider unbankable
Dhiren Rana
maybe I can ask you Kibet...do you have a specific sector in mind?
CHRISTINE VULIMU
How are the banks regarding this?communicating to the common mwanchi
Zena Rashid
There is a case filed in court.. on the basis that interest rates charged by banks since 2004 are illegal. any thoughts on this?
Dhiren Rana
Thank you Christine for your feedback
Dhiren Rana
Kenya Bankers Association as well as Central Bank of Kenya have already done a media campaign to inform public about initiatives to bring down the cost of credit, specifically the Annual Percentage Rate / APR and the Kenya Banks Reference Rate / KBRR
Dhiren Rana
...some of the avenues of enhancing awareness include today's CEO Chat
KIBET LANGAT
I asked that because there seems to be little penetration especially in my rural area with very little awareness on the products
Dhiren Rana
Individual banks are making attempts to communicate APR to every prospective loan borrower...so that is another communication channel which will help consumers come to an informed decision
Angela Nyabera
Hi Bwana CEO, for many SMEs in Kenya, one of his biggest problems has been securing cash flow for day-to-day operations.The challenge faced by most SMEs is that they have relatively low cash reserves hence are constantly relying on chasing one client or another to be able to manage operations. But even getting an overdraft facility from a bank still requires title deeds, log books or some form of security and that’s really the pain area for start up businesses. Especially those not dealing with actual stocks e.g. software development companies. It would be great if our banks cost of credit favoured such businesses.
ENOCK OGUTU
Apart from the several initiatives spearheaded by the banking industry to enhance credit access, what can you tell those who want to borrow but still can not access credit because of lack of security?
CHRISTINE VULIMU
Thank you Angela.You are speaking for the majority of Kenyans who could contribute a lot if this was addressed.
Dhiren Rana
Zena...thank you for your question...the case in court is in relation to bank charges...as you appreciate, the matter is still in court and is being defended
Dhiren Rana
Kibet...thank you for clarifying...and I am sure banking is penetrating fast even in your area as more financial services providers...including banks and bank agents...provide access to financial services in rural and remote areas
Dhiren Rana
Welcome Angela
Mbatia James
I think the banks are missing a point, its not about how easy people will access to cash but how they gonna use the funds. Im sure all banks offer credit inexchange for collateral. Most people dont have the basics for running businesses, so the end up creating a fragmented industry with a low return of capital in the late entrants, which end up frustrating themselves. Losing property along the way.
Shadrack Musyoka
Congratulations Bwana CEO. The live chat is quite informative to the general public
Dhiren Rana
Angela...to address your point...you make very pertinent observation
Isaac Kiplagat
So, Mr Mbatia, does a bank have a role in creating the awareness to the customer as to when he is ready to acquire a loan/credit?
Conrad Karume
Thank you for the insights Sir. Will the new rates apply to loans taken prior to the introduction of the APR and KBRR rates?
Dhiren Rana
...as you are aware various segments of entrepreneurs are served by sector specialist institutions...
Dhiren Rana
...for example, micro finance institutions serve micro enterprises quite well compared to commercial banks
Angela Nyabera
Correct
Dhiren Rana
...SMEs are served by commercial banks
Dhiren Rana
...SACCOs are very important service providers and they too provide significant access to financial services...I believe Kenyas financial services sector is growing rapidly and in coming years will fully meet financial services requirements of all kenyans
Mbatia James
we need a platform that will offer entrepreneur education.
Dhiren Rana
I also want to say that banks have specific products to bridge cash flow needs of SMEs...and collateral requirement is based on the size of exposure as well as cash flow assessment by the bank...this is why startups may typically experience challenges in accessing credit from a commercial bank
Isaac Kiplagat
That is key note
Mbatia James
Because the banks are finding ways to expand their market in the disguise of offering cheap credit.
Dhiren Rana
however...if a startup is eligible under specific structured trade finance they may be in a position to get overdraft or short term loan from a bank
Angela Nyabera
Thanks Dhiren, that's something worth considering / thinking about
Dhiren Rana
Thank you Enock...
KIBET LANGAT
Sir, assessing SME risk has always been difficult in Kenya. This has prompted banks to ask for collateral, charge high interest rates or not lend at all. How do you think this can be addressed?
Dhiren Rana
...collateral is important but when there is a sound business case and clean credit standing of a borrower then banks will be in a position to provide credit such as LPO financing...discounting of cheques...or a small short term overdraft
Simon Lee
the cost of credit calculator clearly shows the high cost of external charges such as legal fees. Are banks looking at or currently provide these services in house at a cheaper rate to reduce the overall cost of credit?
Dhiren Rana
Mbatia James...I do agree that there is no formal training mechanism for first time users of bank credits on prudent use of the money that they borrow
Dhiren Rana
this financial literacy area is one that perhaps we should put more emphasis on as an industry
Isaac Kiplagat
Mr Dhiren Rana, this takes us back to regulatory and policy issues. i personaly don't beieve that competition in banking sector in Kenya is stiff enough to apply pressure on credit issuance.
Dhiren Rana
although there is some degree of education... the credit officers during the credit assessment process do invariably take clients through the implications of borrowing a loan...and also consequences of default in terms of loosing the collateral
Dhiren Rana
Welcome Isaac and Conrad to the discussion...
Isaac Kiplagat
Thank You Rana
Conrad Karume
Thank you Sir
Dhiren Rana
Conrad...APR and KBRR are operational for all new loans and new credits from July 2014..and the same will be operational for all earlier loans and credits over a period of the next 12 months, which is the transition period
BHARAT PATEL
IS THERE A SIMPLE WAY TO LEGALIZE THE RECOVERY OF UNPAID CHEQUES AS IT IS A PART OF COST OF CREDIT IN MY VIEW
Dhiren Rana
Mbatia the issue of awareness and financial literacy is a collective effort and I believe there are some examples and some banks and private training institutions have indeed taken initiatives in this direction
Isaac Kiplagat
Middle East Bank can do that as the next CSR :). Lightnote
Dhiren Rana
Isaac to your point about competition...APR is actually a comparison tool where a consumer is able to compare total cost of credit from different competitors. Therefore, one can approach a number of banks and get the APR quotes and make an informed decision. This is already operational. This will increase the competition across the various loan products that banks offer.
Dhiren Rana
Welcome Bharat Patel
Isaac Kiplagat
Well answered Rana
CHRISTINE VULIMU
Is there a way that the banking institution could make their way into our educational system.to have our your have hands on concerning how to manage funds?
Chat Admin
We welcome all visitors to check out information relating to APR on the KBA website http://www.kba.co.ke
Chat Admin
Correction, the website address is http://www.costofcredit.co.ke
CHRISTINE VULIMU
I meant to say our youth.Is this too small to be addressed by this body?
Dhiren Rana
...Bharat...I am aware that the Credit Reference Bureaus have a database of bounced cheques...this will therefore affect the credit rating of the drawer of bouncing cheques. Also, giving of a cheque that is not good is a criminal offence. Recovery of the amount of course is a court process, which is the legal framework.
Zena Rashid
interesting proposal Christine
Zena Rashid
would reach a wide audience
Dhiren Rana
Christine on the education concerning how to manage personal funds...some initiatives are at concept stage so it will take a little bit of time before schools can benefit
Dhiren Rana
Thank you Simon
Dhiren Rana
...you are bringing a very fresh line of thinking to the discussion
CHRISTINE VULIMU
Thank you Zena.Most young people have stumbled into their parent's debts in the name of family business and morgage.
Dhiren Rana
...the Kenya Bankers Association in partnership with Central Bank and the Treasury are working reforms and strategies that can reduce the costs of external charges.
Dhiren Rana
there are several initatives at the concept stage, including creating a digital movable assets registry
Dhiren Rana
and a securities (collateral) depository, which will allow transfer of securities from one institution to another without having to discharge and charge securities again...this will be more like the transfer of shares at the CDS...and will eliminate high legal costs and also considerably reduce the time for transferring securities
Dhiren Rana
i want to say that Kenya Bankers Association and Kenya Association of Manufacturers have been appealing for the past several years to the Chief Justice concerning need for lowering the tariff under the advocates remuneration act. We are continuing our efforts in that direction.
Dhiren Rana
I wish you acknowledge the presence in this CEO Chat of the KBA Chairman, Mr. Joshua Oigara...who is also the Group CEO of Kenya Commercial Bank
Dhiren Rana
Joshua...thanks for joining us...this is testimony that the whole industry takes the interaction with the banking public very seriously...thank you for your valuable time
Dhiren Rana
Before we wind up...I want to simplify KBRR term
Dhiren Rana
This reference rate is a uniform rate adopted by all banks in Kenya and KBRR / Kenya Banks Reference Rate brings to an end the system of base rate
Dhiren Rana
The fixing of base rate and the choice of time of changing the base rate was earlier discretion of every individual bank...
Chat Admin
Hi all, we experienced a brief connectivity issue a few minutes ago. If you are experiencing any issues please reload the chat page.
Dhiren Rana
...now, Central Bank publishes KBRR, which is an arithmetical average of 91 day treasury bill and the Central Bank Rate / CBR
Joshua Oigara
Thank you Rana.
Chat Admin
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Chat Admin
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Dhiren Rana
Banks now quote interest rate in their letters of offer at a given margin above KBRR
Dhiren Rana
Therefore, it makes it very easy for customers to compare the cost of borrowing from different banks, and the customer also is assured that whenever KBRR comes down, simultaneously the cost of borrowing will come down.
Dhiren Rana
This brings in an element of competition and enhanced transparency and these two elements will eventually help reducing interest rates
Peter Ng'ang'a
Bwana MD, following the chat there's good that comes KBRR and the need to grow the lending market. My question is, what is the financial institutions inclusive of the central bank doing in strenghthening the Financial Risk Management systems in Kenya.
Dhiren Rana
Welcome Peter Ng'ang'a
kepha msafari
Demand and Supply determine the cost of goods and services.How is the kenyan banker able to control this in relation to credit?Is KBRR tied to this?
Dhiren Rana
You have a very important question
Peter Ng'ang'a
Thank you Md
Dhiren Rana
...for the last decade or so, a lot of work has been going on to strengthen financial risk management within individual banks; also in the supervision of banks by Central Bank of Kenya.
Dhiren Rana
...various technology based tools are also deployed to identify financial risks and to better manage them
Dhiren Rana
...these include technology surveillance against frauds, and mechanisms such as credit information sharing, etc.
Dhiren Rana
...these help banks avoiding risky propositions and also to guard against frauds.
Dhiren Rana
despite many fold growth of the banking services in the country over the last decade, the stability of banks in Kenya has not been compromised this is the result of new found focus on financial risk management within banks and at Central Bank.
Dhiren Rana
Thank you Kepha
Dhiren Rana
Demand and supply factors ultimately decide the market interest rates...which get factored into KBRR, therefore, KBRR is a representative mechanism of market demand and supply.
Chat Admin
We have run a little over time. Are there any final questions of comments before Mr Dhiran Rana wraps up the chat session with some final thoughts.
Dhiren Rana
As I wrap up, let me share that the KBA, CBK, and the Treasury are working together to enhance credit access and to lower the cost of credit, which includes interest rates and other charges and the high cost of doing business. Among the initiatives are measures to achieve reforms in the Lands and Companies registries; expansion of credit information sharing beyond banks to all credit providers; enhancing consumer protection practices; conceptualizing of alternative dispute resolution mechanisms; and transparency in the pricing which drives effective competition...some of these initiatives are already put in place (e.g. APR, KBRR) and others are on course.
Dhiren Rana
Thank you all so very much for joining this CEO Chat
Joshua Oigara
Thank you and many thanks.
Lucy Matito
Thank you sir for the sinsights
Dhiren Rana
I wish to invite you all to our next CEO Chat, scheduled next Friday at 10am when Mr. Sonola, CEO of GT Bank, will discuss the country risks, pricing of risks and credit information sharing
Conrad Karume
Thank you very much Sir, KBA and the technical team behind this forum.
John Komu
this was a very interesting chat, i look forward to more..
Dhiren Rana
I wish to thank you all for your valuable time. Kenya Bankers Association, as well as your own banks welcome you to exchange any ideas or seek any clarifications on banking related issues.
Chat Admin
Thank you Mr Dhiran Rana for taking the time to be with us this morning and hosting this informative chat session.
Chat Admin
Thank you to all of you for your questions, comments and insights. We look forward to being with you all online at next weeks chat session.
Chat Admin
You will be able to see the full transcript of this chat session and a podcast in the Archives section of the Chat website http://chat.kba.co.ke shortly.