CREDIT

Banks push for risk-based lending but experts differ

Kenya has been working ton the model since repealing the interest capping law in 2019

In Summary
  • KBA insists that risk-based loan pricing would see a sharper growth in credit to segments perceived to riskier
  • Experts say it will choke credit supply to certain segments
KBA Chairman John Gachora, former chairman and KCB Group MD Joshua Oigara and CEO Habil Olaka during the KBA Annual General Meeting
KBA Chairman John Gachora, former chairman and KCB Group MD Joshua Oigara and CEO Habil Olaka during the KBA Annual General Meeting
Image: COURTESY

Bankers are piling pressure on the Central Bank of Kenya to adopt risk-based lending arguing this will unlock credit to the private sector.

The Kenya Banker's Association says the model if introduced will also solve short to medium term inflationary threats.  

It said the current lending model has resulted in a build-up in liquidity in the banking system and this will continue unless the pricing framework is changed to fully reflect the market risk.

"With the credit risk remaining elevated on the back of a protracted uncertainty and a gradual recovery in household and business earnings - as the effects of the pandemic continue to bite, the incentives for the banking sector to grow private sector loans remain low," KBA says in a research note. 

The lenders' lobby said that risk based loan pricing would see a sharper growth in credit to segments perceived risker such the micro and small-medium enterprises. 

Under risk-based pricing, lenders offer different consumers different interest rates or other loan terms based on the estimated risk  for each borrower.

Kenya has been working on a risk-based loan pricing model since repealing the interest capping law in 2019. Lenders are said to have complained to IMF officials during their recent visit about CBK's hesitation in approving the model

Last week, a banking sector outlook by Renaissance Capital showed that while CBK  has approved the risk-based pricing templates of two small banks, it is yet to authorise templates for top-tier lenders.

This even as the sector battles high non-performing loans brought about by the Covid-19 pandemic and is desperate for a raise on interest margins to save their bottom lines ahead of elections.

The approval of the loan pricing was one of the key expectations as the  Monetary Policy Committee sat yesterday. 

While lenders are counting on it, financial experts are pessimistic. 

Last year, investment experts at  EFG Hermes cautioned against adopting risk-based lending, arguing it provides loopholes for the exploitation of borrowers.

''Although charging borrowers based on their credit history is democratic, stronger modalities must be put in place to ensure fairness,'' EFG experts said.

Similar views were shared by IMF in mid-2019 when it warned against replacing the interest capping law with risk-based pricing.

In a My 2019 paper on the effects of interest controls, with Kenya as a case study the international lender suggested a ceiling at a rate high enough to facilitate lending to higher-risk borrowers.

"Setting the lending ceiling in this manner would stop the most egregious forms of predatory lending, by providing a ceiling, but still provide sufficient margin to compensate for risks,’’ IMF said.

The lender proposed that the ceiling be set at the average of past monthly rates plus a margin.  It said that this margin would, however, need to be in the double digit to avoid pushing out high-risk borrowers.

Late last year, experts at Deloitte said Kenya risks choking credit supply to certain segments of borrowers if it adopts risk-based lending.

According to Charles Luo, leader, Deloitte Financial Institutions Services Team, the approach will give wealthy customers easy access to low-cost loans while less well-off borrowers may not be able to bear the costs  denying them credit.