The last three weeks have seen Kenyan banks release their half-year results with the majority posting multi-billion shilling profit.  All 7 banks that have released their six-month earnings so far have shown growth in profit from last year amidst a high interest rate environment in what is turning out be a contentious issue involving Members of Parliament according to a news report in the Business Daily.

A main area of controversy is the fact that Kenyan Banks have reaped more in the year while the public has been economically stunted due of the high costs of borrowing.

Profitability

The four most profitable Kenyan banks as per this year’s half-year earnings are KCB, Equity, Standard Chartered and Barclays Banks. All have posted larger than normal profit growth this year largely due to more interest income collected in the period.

Below is a graph showing the percentage growth in their profit for the first six months of this year compared to the same period last year:

KCB earned 7.9 billion shillings while Equity, Standard Chartered and Barclays earned 6.9 billion, 6.5 billion and 6.3 billion shillings respectively from January to June this year.

Interest Income

Interest income, which is the money banks make from the interest charged on customer loans and advances, has been the biggest contributor to the higher earnings for Kenyan banks this year. Banks typically charge interest on the money they loan out and also pay interest on depositors' money. The core mode of business for most banks is to charge a higher interest on the money loaned out to customers than what they will pay as interest to customer bank deposits. This difference is known as the interest rate spread and is the main way in which banks make money.

Based on the above rationale, the higher the interest charged on bank loans, the more money banks make because they do not necessarily increase the interest rate on deposits when loan interest moves up.

Local banks have seen the benefits of the higher interest rate environment since the CBK raised the base lending rate to 18 percent in December last year and kept it there until July. Since Kenyan banks borrow their money from the CBK at the base lending rate, they simply transferred the higher interest costs to their customers in order to protect their margins. The effect was that many borrowers faced higher interest charges on their loans needing intervention by the Kenya Bankers Association to avoid mass loan defaults.

To show you just how much Kenyan Banks have profited from the higher interest rate environment in the first half of the year, we have prepared the chart below comparing the amount of money banks collected from interest charged on customer loans versus that which they paid on customers bank deposits (for the first half of this year):

As you can see from the chart, all of the top four banks collected more interest from their customers than they paid on deposits. Barclays Bank had the biggest margin having made 6 times more interest from loans than it paid on deposits.  Equity Bank had the second greatest margin making 5 times more interest from loans than it paid on customer deposits while  Standard Chartered and KCB made 4.3 and 3 times more respectively.

Fees and Commissions

In addition to the interest charged on loans, banks also levy fees and commission on the same. KCB, Equity, Standard Chartered and Barclays have collected loan fees and commissions worth a total of 4.6 billion shillings from January to June this year.