Why do banks charge fees on inactive accounts?

In the last year, Covid-related lockdowns, curfews and restrictions have impacted the earnings of workers across the country.

Many, particularly in the service industry, have lost their jobs as restaurants, bars and other retail businesses have been forced to close. Many of these folks would have held bank accounts and many may now find themselves in the sights of yet another crisis.

Even before the pandemic, research by Financial Sector Deepening Trust Kenya had shown that one in every five bank accounts in the country was dormant, meaning it had not been operated for over six months. The main reason given for this was a loss of income, which highlights the fact that most bank accounts are only opened for the purposes of processing salary and livelihood payments. When these cease, and with the cost of closing an account averaging nearly Sh1,000, many Kenyans simply walk away, either assuming the accounts will be available for use when payments resume or that the banks will close them. This is not exactly what happens.

After declaring accounts inactive, banks will usually block access to them but still keep charging ledger fees. Over time, such charges and penalties can build up. When the banks do eventually close the account, customers can find themselves on the hook for thousands of shillings.

Despite the Central Bank of Kenya declaring in 2011 that “failure to close a bank account does not in itself amount to defaulting on a loan” and that banks shouldn’t report them to credit reference bureaus, it appears that is still happening. Or, at the very least, banks are still using the blacklist as a threat. In addition, to reactivate the dormant account, some banks will charge up to Sh500.

Thus thousands who have been rendered jobless by the pandemic may already have been pushed further into debt or have been blacklisted — meaning they cannot access credit — perhaps at the very moment they most need it.

To me, this raises some disturbing questions. When a bank blocks your account for inactivity, prevents you from accessing the money in it while continuing to charge you for "maintaining" it, and then require you to pay to "activate", what exactly have they been charging you for all these months?

Put another way, let’s say I pay rent for a house but don't live there for six months. The landlord declares the premises inactive, boards it up and says I can no longer use it unless I go to him and pay for a new set of keys but keeps charging me rent. What exactly would I be paying for?

My bank manager told me the banks are required by the CBK to block dormant accounts but admitted it would be “tricky” to explain why a bank would continue to charge fees to “maintain” accounts it had blocked.

Kenyans have always had a problematic relationship with banks. For most of the colonial period, the economy was dominated by the activities of a tiny minority made up mostly of British and Indian settlers. Three British-owned banks dominated the banking industry and largely ignored the African majority, who were seen as unable to sustain commercial and deposit business, and lacking in sufficient collateral to secure loans.

Following the end of World War 2, the commercialisation of African agriculture led to an influx of new, though still foreign-owned, banks and the opening of a few branches in the African districts for the first time.

After independence, the government promoted Africanisation of the economy, employed more Africans into the civil service and drove rapid economic growth through public investment and encouragement of smallholder agricultural production.

A growing African elite was thus able to access banking services. However, most were kept out by onerous requirements that, till the 1990s treated opening a bank account like joining a country club, with one required to pay huge fees, maintain high minimum balances and even produce a letter of recommendation from an existing bank customer.

“My late mother, Grace, who brought me up, was never allowed to get a bank account,” Equity Bank CEO James Mwangi said in an interview at the Harvard Business School. “Everybody in my village was not eligible for a bank account”.

While today many Kenyans can access an account, the attitude of the banks towards them has sadly not changed. Opening and maintaining a bank account is still a punitive experience for many, especially the poorest.