July 18, 2024

Understanding Interest Rate Trends in Kenya

Interest Rate

Bank overdrafts have become a common financial tool utilized by individuals and businesses in Kenya to manage short-term cash flow needs effectively.

These overdraft facilities allow account holders to withdraw more money than they currently have in their accounts, providing a buffer for unexpected expenses or temporary liquidity shortages. 

In recent years, Kenyan banks have offered a range of overdraft facilities with varying interest rates, reflecting the competitive dynamics of the banking sector. Among the banks offering overdraft facilities, there are notable differences in the interest rates charged, ranging from the highest to the lowest in the market. 

Starting with the banks offering the highest interest rates for overdraft facilities, Kingdom Bank leads the pack with an interest rate of 15.2%. Following closely is ecobank kenya, offering overdraft facilities with an interest rate of 14.7%.

Gulf African Bank offers overdraft facilities with an interest rate of 14.4%, while Middle East Bank follows suit with an interest rate of 14.3%. 

Rounding up the list is guardian bank kenya, offering overdraft facilities with an interest rate of 14.1%. These rates indicate the annual percentage rate (APR) at which account holders will be charged interest on the overdraft amount utilized.

Consider Kingdom Bank, which offers an interest rate of 15.2% for overdraft facilities. For instance, if a customer borrows Ksh 100,000 through an overdraft from Kingdom Bank, they would be charged an interest of Ksh 15,200 over a year, provided the full amount is utilized. 

This interest rate impacts account holders by increasing the cost of borrowing and affecting their overall financial planning. Such high rates may deter borrowers or increase their financial burden

Comparatively, banks offering overdraft facilities with the lowest interest rates in Kenya provide alternative options for account holders seeking more affordable borrowing solutions.

Dubai Islamic Bank (DIB) leads the way with competitive interest rates, followed by Bank of Africa, Housing Finance, Consolidated Bank, and Diamond Trust Bank (DTB).

According to the Central Bank of Kenya (CBK), the weighted average overdraft rate for commercial banks in Kenya exhibited fluctuations throughout 2023.

In March, it stood at 12.69%, rose to 13.24% by August, and then declined to 9.11% by October.

As of September 30, 2023, the average lending rate for commercial banks in Kenya was recorded at 14%, while the average deposit rate was 8.6%.

These figures marked an increase from the rates observed in September 2022, which were 12.4% for lending and 6.8% for deposits.

The government of Kenya mandates the limit for the overdraft facility, setting it at 5% of the bank’s gross recurrent revenue.

For the fiscal year ending June 30, 2023, this limit was established at Sh80.05 billion, based on the gross recurrent revenue reported for the fiscal year ending June 2021.

Bank account overdrafts come in two main types: authorized and unauthorized overdrafts. Authorized overdrafts are prearranged agreements between the account holder and their bank, where both parties agree to a borrowing limit.

This arrangement allows the account holder to spend more than their available balance on normal payment methods. 

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However, this convenience comes at a cost, as banks typically charge a service fee for authorized overdrafts. Interest is often applied to the borrowed amount, with annual percentage rates (APRs) ranging from 15% to 20%.

Given the potentially high fees, account holders should exercise caution to avoid overdrafts, even when authorized.

On the other hand, unauthorized overdrafts occur when the account holder spends more than their account’s remaining balance without prior agreement with the bank. 

Even if there was a preexisting arrangement, exceeding the agreed overdraft amount can still result in an unauthorized overdraft.

These unauthorized overdrafts incur higher fees compared to authorized ones, making them even more costly for the account holder.

Despite the potential drawbacks, bank account overdrafts offer several advantages. Firstly, they are useful for bridging short-term cash mismatches, such as when payment dates precede the receipt of funds. 

By utilizing an overdraft, account holders can settle outstanding payments without bouncing checks or incurring late fees. Moreover, overdrafts ensure timely payments and prevent negative impacts on credit scores.

Another advantage of bank account overdrafts is their convenience and simplicity. Unlike traditional loans, overdrafts require minimal paperwork and can be accessed whenever needed, provided the agreement with the bank remains in place.

This flexibility makes overdrafts a convenient option for addressing temporary financial shortfalls.