In a quest to boost profits in an industry that is being squeezed by falling interest rates and mounting competition, Kenyan banks have been aggressively boosting fees and other hidden charges on a largely uninformed customer base.

Despite various advertising claims promising customers simple and special unified tariffs, these levies have become so important to banks' earnings power such that in 2006, the Central Bank of Kenya (CBK) statistics showed that at Sh30 billion, this revenue stream accounted for nearly a third of the industry's revenues of Sh94 billion.

This was more than the pre-tax profit of Sh27.30 billion earned by the industry in that period.

These levies are usually charged alone for instance when a customers deposits money over the teller booth or are tucked on personal loans in the form negotiation fees and insurance cover among others.

To many consumers, these charges and an ever growing array of confusing legal and trade terms, which are usually contained in impenetrable fine print of loan documents mean little, but as some consumers are now starting to learn they can add up to the cost of borrowing dangerously and very fast.

It is this lack of clarity that has traditionally shackled Kenyan consumers in loan contracts that they little understand. This is despite the limited options in the banking law that allows the CBK to periodically publish comparative data on various charges levied by commercial banks.

With increased advertising to promote personal, asset and homes loans, another problem is emerging. Clever schemes to market these products are not only adding to the effective interest rates that consumers are paying but it has also become difficult to compare the best deals offered across the sector.

However, with Kenya's consumer credit continuing to push lending, which stands at Sh74 billion out of the total industry lending of Sh595 billion, an unlikely champion of truth in bank lending is emerging among Kenyan courts.

As case in point was a ruling by High Court Judge Ibrahim Warsame who decided against Housing Finance in favour of a borrower who sued to stop a foreclosure of a family property. The plaintiffs claimed that excessive charges had almost eclipsed the original mortgage borrowed.

Interviews with experts in the banking sector blame the current problem to lack of a law to standardize the various trade terms and how they are loaded into the calculation of interest rates to enable consumers to compare the best deals in banking products.

Analysts blame lack of credit advertising guidelines for the way banks have shortchanged borrowers by not disclosing the actual cost of borrowing. Credit experts warn that lack of such guidelines could spawn sector wide defaults in future.

Unlike in the UK and other developed countries where it is a rule to write interest rate values in varying fonts and include a key interests rate derivative, called Annual Percentage Rate (APR) or Effective Annual Rate (EAR), Kenya does not hold banks to such standards in their marketing of consumer loans.

"Unfortunately for Kenya, there is no law requiring certain minimum disclosure for banks advertising loans," said Mr Patrick Ameyo, head of mortgage lending at Barclays Bank of Kenya.

The Marketing Society of Kenya has no such guidelines on credit advertisement and maintains that it is up to the stakeholders in various sectors to structure the advertisements for maximum information disclosure.

"As per what information should be included in an advertisement, what we have are general industry guidelines, nothing specific," an MSK official, Mr Sammy Kariuki said.

Loan advertisements in Kenya leave out an important interest rate derivative - Annual Percentage Rate - that shows what the actual cost of the loan would be if 'hidden charges and costs' were included. Neither does it have a risk-warning caption as is the case in countries with developed financial systems.

Now insiders say that with increased lending in the economy, there is need for stakeholders to come up with a financial advertising guideline which allows customers to judge loan offers based on loan indicators that give an accurate picture of the actual cost of a loan.

"It is not fair on the part of customers if different banks use different wording while referring to loans in their advertisements while the basic principles are the same," said Mr Ameyo.

According to insiders, words like flat rate, interest rates figures which do not explain what they capture and monthly interest rates as opposed to annual rates have led to a notion among the not so financially literate that what is written in the advertisement is only what they will pay.

Financial institutions, however have come to the defence of their advertisement trends, saying that there is only so much information that can be carried in an advert. Banks also maintained that customers are normally fully told of additional charges involved in securing a loan or a mortgage and issued with booklets containing all the information.

"Advertisements only serve to bring customers to the bank, where they get all the details of the loan," said Ms Beatrice Maingi, the head of secured lending banking division at Standard Chartered.

She however agreed that the introduction of such a guideline would be a bold step in streamlining the banking industry. The question of how banks advertise interest rates to clients is a question that some industry players say is complicated due to the reluctance by banks to create general guidelines on loans and mortgages.

But responding to the concern assistant Finance Minister Peter Kenneth said banks are required by law to disclose the full cost of the loans in their offer letter and that they would soon consider introducing a guideline to streamline the industry.

Investigations by Business Daily revealed that even in cases where interest rates had been adjusted to take care of hidden costs, insurance fees, legal fees and loan-processing fees are preloaded without the necessary information that it increases the cost of the loan.

Key among the loan cost indicators included in the calculation of APR gives indication of the cost of the loan plus other charges, such as additional costs prepaid interest, points and loan origination fee among other charges.

APR is designed to standardize the representation of interest rates and convey the true cost of the loan to the borrower, expressed in the form of a yearly rate.

The purpose is to prevent lenders from hiding fees and other upfront costs behind low advertised interest rates.

According to financial experts though, lenders have some discretion when choosing which fees to be included in the calculation of an APR. The indicator would serve potential borrowers immensely as it can level the field.

While some lenders may charge lower interest rates but add high fees, others do the reverse. An Annual Percentage Rate (APR) would allow one to compare loans on equal terms. It combines the fees with annual interest charges to give the effective annual interest rate.

The need to establish banking industry credit advertising guidelines is made urgent by the high liquidity in the market that has shifted the ground for competition from interest rate value to marketing ploys.

Hidden charges are not a new phenomenon worldwide. The US passed the Truth in Lending Act to solve the issue, while the UK passed the Consumer Credit Act.