Investment experts at Investment Banking firm EFG Hermes have cautioned Kenya against adopting risk-based lending, saying it provides loopholes for the exploitation of borrowers.
Speaking during a virtual media forum, they said the suggestion by the Central Bank of Kenya (CBK) in its recent white paper leaves borrowers at the mercy of lenders.
''Although charging borrowers based on their credit history is democratic, stronger modalities must be put in place to ensure fairness,'' EFG experts said.
Kenya Bankers Association (KBA) and Central Bank of Kenya (CBK) have been fronting risk-based pricing of loans since 2019.
In the white paper issued ahead of last week's Monetary Policy Committee (MPC) sitting last week, the apex bank called for the modernization of monetary policy framework and operations.
In the paper, the regulator briefly mentioned risk-based pricing without giving further details.
A white paper is an informational document usually issued by an organization to promote or highlight the features of a solution, product, or service that it offers or plans to offer.
''Investors are waiting to see the new risk-based pricing model by the CBK. Currently, lending has shrunk at smaller banks and this will be a catalyst that enables them to better price loans and resume lending,'' head of equities Kenya at EFG Hermes Muathi Kilonzo said.
The warning by EFG Hermes experts marries earlier one issued by the International Monetary Fund (IMF).
In a study on the effects of interest controls, with Kenya as a case study published in May 2019, IMF opposed the risk-based pricing model, saying it will fuel exploitation.
''It is hard to regulate this kind of loan pricing model,'' IMF said.
This warning by IMF saw the regulator hold the plan to add breaks to free float loan pricing after the repeal of the law capping loan rate at four per cent above the Central Bank Rate.
Through a Banking Sector Charter (2019) CBK instructed banks to quickly shift towards customer-centric, risk-based loan pricing and transparency to ensure banks don’t arbitrarily raise lending rates and harm borrowers.
The banks’ loans pricing model requires banks to price loans based on factors considered ‘relevant to the prevailing economic environment.
The banks, through their lobby, said the loan pricing models for individual banks are constantly reviewed by the Central bank to ensure they are efficient in pricing customer loans.
If adopted, most borrowers in the country are likely to pay more due t their high-risk status.
The latest data by Metropol CRB shows at least five million more Kenyans have been blacklisted on the Credit Reference Bureau (CRB) in a period of five months since August 2020.
According to the listing agency, 14,035,718 Kenyans had been negatively listed by January 2021, a major increase from 9,673,258 in August 2020.
The numbers rose after the expiry of a six-month grace period that saw the regulator suspend the listing of loan defaulters on September 30.
The CRB listing relief was part of a stimulus package to cushion distressed businesses and individuals from the effects of the coronavirus pandemic.
Even so, the MPC data released by CBK last week shows that borrowers have started repaying loans, with the non-performing loans rate dropping to 14 per cent from 14.2 per cent in May.
Profitability at Kenyan lenders is also showing signs of improvement, according to CBK figures.
Combined industry pretax profit in the three months ended March almost doubled to Sh45.9 billion from the Sh23.6 billion recorded in the preceding quarter.
