- Equity Bank is the first lender to publicly reveal that the CBK has endorsed the element of risk in its loan formula, pricing its loan between 13% and 18.5%.
- Banks have been keen to price loans to different customers based on their risk profile, but this flexibility remained a mirage after the CBK stepped in as the de facto controller of the cost of credit.
- Small businesses will get loans at between 14% and 16% from Equity Bank, while unsecured loans will attract up to 18%.
The Central Bank of Kenya has started approving requests from lenders to raise the cost of loans based on customer risk, paving the way for expensive credit for small traders and informal sector workers.
Equity Bank #ticker: EQTY is the first lender to publicly reveal that the CBK has endorsed the element of risk in its lending formula, pricing its loan between 13% and 18.5% from the current average of 13.5%.
Several bank executives had protested at the end of the year to the International Monetary Fund (IMF) against the reluctance of the CBK to approve their requests for higher loan costs following the removal of interest rate controls on November 7, 2019.
Banks have been keen to price loans to different customers based on their risk profile, but this flexibility remained a mirage after the CBK stepped in as the de facto controller of the cost of credit.
Equity Bank said on Monday the regulator had approved its subprime lending models after two years of talks, saying the CBK has now started allowing banks to gradually raise rates.
“Interest on loans will now be based on the customer’s risk. We use sovereign risk as the basis, then we add the individual sector risk, then within the sector the specific client risk, then we add operational costs,” Mwangi said.
“Thus, instead of the previous [pricing model] where we had loan appraisal fees, and all that, now we say there’s an interest rate and it’s annualized and reduces the balances. We have simplified and removed fees and combined the rate into one based on sovereign risk.
Mr Mwangi said the new pricing model will have a base of 13%, which is the average rate charged on government bonds over five years old.
Small businesses will get loans at between 14% and 16% from Equity Bank, while unsecured loans will attract up to 18%.
“There are companies like blue chip companies that will be able to get rates as low as sovereign rates. Those with higher risk will go up to 16%, then there are SMEs from 14% to 16% Individual unsecured loans to micro, small and medium enterprises from 16% to 18%,” Mr. Mwangi added.
Other major banks such as Cooperate Bank #ticker:COOP , KCB Group #ticker:KCB and NCBA Group #ticker:NCBA have remained tight-lipped on their requests to the CBK for the revision of their lending rates. Bankers are worried about speaking publicly for fear of retaliation from the CBK.
“Getting approval is a nightmare. CBK has taken a more protective approach to customers as opposed to industry needs,” a bank CEO told the business daily in a previous interview.
Banks say the late shift to risk-based lending has forced many to invest more in government securities and restrict lending to high-quality customers with lower risk of default.
This came at a time when the supply of loans to the private sector increased by 8.6% in the year to December 2021, which is below the ideal rate of 12-15% needed to support the growth. economic growth.
“With an abundant capital position and strong deposit growth, banks are well positioned to lend to the economy to support the recovery, although they may face headwinds,” the IMF said. .
“Banks’ holdings of government securities stand at a relatively high 31% of assets and are expected to increase further in the coming year.”
The IMF says Kenya’s lending rates have changed little from when the state controlled bank lending costs.
Lending rates averaged 12.38% in November 2019 when the rate cap was lifted, with the central bank rate (CBR) then at 8.5%.
In January, lending rates averaged 12.12%.
To play it safe, banks cut average lending rates slightly in line with the CBR cut, which was lowered to 7%, highlighting the conundrum lenders find themselves in.
The government removed the cap after being accused of stunting credit growth during its three-year existence.
Banks use a base rate which is normally the cost of funds plus a margin and risk premium to determine how much they should charge a particular customer.
The cap, which set rates four percentage points above central bank benchmark loans for all customers, had removed that equation and the flexibility that lenders say they need to accommodate customers who are considered low-cost borrowers. risk.
The inability to assess loan risk is excluding many potential borrowers as banks seek to reduce their exposure to already large defaults caused by the Covid-19 pandemic.
Banking Regulations 2006 require banks to seek CBK approval when changing the features of any product, including loans.
“Any modification of product functionality modifies the product as previously approved and therefore the product modified with less, more or otherwise varied functionality must be approved by CBK prior to deployment,” CBK reminded banks in a circular from 2016.
The CBK has repeatedly warned banks against returning to punitive interest rates of over 20% under the rate cap regime and wants each lender to justify the margins they put in their formula .