Bankers defend re-introduction of risk based lending

The apex bank nodded to Equity Bank's plan early this week that seeks to price loans at between 13 to 18.5%

In Summary
  • Lender submitted individual plans to the regulator two years ago
  • Some customers and institutions are opposed to the new model, saying it will entrench classism and inequity. 
CBK Headquarters
CBK Headquarters
Image: FILE

Kenya Bankers Association (KBA) fully supports the risk-based loan pricing model and hopes that the regulator will approve submissions by individual banks.

On Thursday, the lobby's chief executive officer Habil Olaka said they are fully behind the loan pricing model.

''Yes, we support the loan pricing model. Each lender presented its plan to the regulator for review,'' Olaka said. 

The Central Bank of Kenya has already cleared Equity Groups application that seeks to price loans at between 13 to 18.5 per cent

Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will default.

Banks in Kenya are hoping that the Central Bank of Kenya will soon approve their risk-based loan pricing models before the end of this month after a two-year wait.

On Monday, Equity Bank Group CEO James Mwangi said the new pricing mechanism clears the path for lenders to accommodate everyone irrespective of their risk, unlike during the interest rate cap regime.

Equity's computation of a single interest rate was arrived at using an opportunity cost approach, where, it considered the rate the state pays for its loans as a risk-free entity and then added on its operational and credit risks to arrive at the final price.

Yesterday, CBK declined to comment on when it is likely to clear other lenders.

Last July, CBK governor Patrick Njoroge said that the regulator had assessed the models of lenders and approved many while sending others back for revision.

“We had those conversations with them and we have moved on with a lot of these banks. There have been some that had not done their work well so we asked them to revise,” Njoroge said.

He added that part of the discussion involves an explanation of factors that determine the pricing of loans such as the cost of funds, return on assets, operating costs and the risk premium relative to the non-performing loans.

Co-operative Bank said it is hoping to hear from the regulator any time soon. 

"Every lender submitted its risk-based pricing formula to CBK two years ago. We hope that the approval of Equity's plan will pave the way to others in the market,'' said its communication director Francis Ngambi.

While lenders are anticipating the approval, some consumers have turned to social media to condemn the pricing model, with several saying it promotes  classism. 

A Twitter user @KalenjinFinest for instance says the model will make the rich, richer and poor, poorer. ''Why punish the poor for lacking"?.

"Say bye to the fight against iniquity. The poor are on their own,'' @CharlesOtibo tweeted on news that Equity's risk-based pricing model has been approved. 

The International Monetary Fund (IMF) was initially opposed to the idea and only changed its position on the risk-based pricing model after intense lobbying.

The international lender had in May 2019 warned against replacing the interest capping law with risk-based pricing. It instead 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.

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 sentiments are shared by Deloitte Financial Institutions Services Team which says the model gives wealthy customers easy access to low-cost loans while denying less well-off borrowers.

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