Banks try incentives to capture customers

A man withdraws money from a bank. Banks are now offering their customers incentives such as cash-backs, interest rate discounts and fee waivers in order to attract borrowers. PHOTO BY RACHEL MABALA.

What you need to know:

Some banks are whetting customers’ appetite to borrow by offering reduced interest rates for unsecured personal loans.

Commercial banks have come up with a number of inducements including cash-backs, interest rate discounts and fee waivers, among others, as they struggle to revive growth in loan advancement to the private sector.

This is in the wake of a slowdown in most commercial bank loan books that contracted as businesses and individuals in the country grappled with double digit inflation that resulted in a steep rise in lending rates.

Barclays Bank, for instance, recently scrapped insurance charges for customers taking personal unsecured loans. Prudent financial services management policies require that a bank charges a fee for every loan given out to mitigate risks of non-payment.

This means that the cost of insurance which is included in one’s monthly loan repayment and paid to the insurance firm allows for the insurer to pay the loan balance in case of death or permanent disability of the borrower.

According to Barclays Bank retail director, Mr Nazim Mahmood, relieving customers of insurance fees seeks to give them peace of mind and lower the costs involved in financing a loan. “When the bank takes up the payment of the insurance, it means that our customers are able to get their prospects financed with peace of mind in case the insured eventualities occur,” he notes in a statement.

Mr Mahmood notes that the bank will, however, bear the cost of insuring all personal unsecured loans on behalf of its customers. Commercial banks charge between 0.45 and 2.50 per cent of the total amount as insurance fees, depending on the institution and the risk of the borrower.

Banks including Stanbic, Standard Chartered and Housing Finance, are also whetting customers’ appetite to borrow by offering reduced interest rates for unsecured personal loans. Stanbic, for instance, cut its interest rate for personal unsecured loans to 15.8 per cent while Standard Chartered slashed its interest rate for a similar loan product to 15.9 per cent.

Housing Finance Bank, on the other hand, is running a three-month promotion that started in January where lucky borrowers win a trip to China and a cash incentive of Shs3.6 million ($1,500) among others in what it termed as ‘salary loan bonanza’.

Unlike before when a borrower would start repaying the loan immediately, this time around, banks are also offering borrowers a break of two months before commencing to repay the loan. Although the Central Bank Rate has come down to 11.5 from the high of 23 per cent in 2011, commercial banks have only reduced lending rates marginally, with the market average standing at 21 per cent.

This, according to Central Bank deputy governor Louis Kasekende has subdued lending, with the target for credit growth falling below the 15 per cent target. This has also trimmed commercial banks’ loan books and revenue.

It should be noted that banks profit a lot from income and fees charged on loans, as witnessed in the 2011 when most financial institutions posted growth in revenues, supported by high interest rates.

Banks have always attributed the sticky fall of interest rates to a number of factors including the high cost of mobilising funds and high operating cost among others. Industry experts, however, predict that potential borrowers should expect to see many more attractive loan/interest rate deal cuts pop as lenders grapple to attract new business through aggressive pricing.

“This could be the beginning of price wars leading to a new round of interest rate cuts which is all good for the banking public,” says Mr Stephene Kaboyo, the Alpha Capital Partners managing director. Standard Chartered Bank’s head of corporate affairs Herbert Zake also notes that lending rates will continue easing as macro-economic conditions in the market continue improving.

Customers warned
However, a source in one of the banks who asked not to be named because he is not authorised to speak on behalf of the institution, urges potential borrowers to “think twice” before simply taking up new loans because of the incentive offered and that they should also be extra careful.

“People need to be careful with the incentives because removing insurance fees or getting a cash incentive might not be the best if the interest rate is higher than what you can get somewhere else or if other institutions would be a better option,’’ the source notes. Mr Kaboyo, however, notes that the move taken by the big banks to lower lending rates could see other institutions follow suit.