Absa sets sights on unveiling risk-based loans in second half


Absa Bank Kenya Chairman Charles Muchene (Centre) Interim Chief Executive Officer Yusuf Omari (right) and Interim Chief Financial officer Moses Muthui (left) during the Bank's 2022 full-year financial results investor briefing at Villa Rosa Kempinski Nairobi on Wednesday, March 15, 2023. PHOTO | DENNIS ONSONGO | NMG

Absa Bank Kenya is eyeing the second half of the year to implement its risk-based loans pricing model, a move that will boost interest margins and enable it to expand credit access.

The lender is yet to reprice its loans despite having received approval from the Central Bank of Kenya (CBK) to set differentiated interest rates based on a customer's creditworthiness.

The bank says the implementation of risk-based lending presents an opportunity to grow revenues while navigating headwinds including pressure on credit losses from high inflation and currency depreciation.

“We have opportunities for risk-based pricing to make sure we can manage through that (2023) headwinds,” Absa interim Chief Finance Officer Moses Muthui said last week.

Absa is among three top banks to obtain the regulatory nod to reprice loans based on the risk profile of each borrower with others being Stanbic Bank and Equity Bank.

Unlike Equity which has since repriced interest rates on some loans after obtaining approval, Absa says it is yet to finalise the rollout of the new loan pricing.

Equity’s adoption of risk-based lending started in January and has seen riskier borrowers pay interest rates of up to 21.02 percent.

“We are at the tail end of putting systems and processes in place and from there we will now execute on it. Risk-based pricing will allow us to reach a set of clientele who we had ignored in the past,” Absa interim managing director Yusuf Omari said.

Risk-based pricing allows banks to assign different interest rates to different customers based on the calculated risk of each borrower.

So far, the CBK has allowed 24 of Kenya’s 39 banks to increase their lending rates based on the borrower’s risk profiles with the majority of the approved lenders being smaller outfits including Credit Bank and Victoria Commercial Bank.

But even without adjusting its interest rates for risk, Absa’s average yield on loans rose to 11 percent in 2022 from 9.7 percent in 2021 based on a rising interest rate environment.

The CBK lifted the benchmark interest rate for the first time in nearly seven years with the rate closing the period at 8.75 percent from a flat seven percent.

Absa customer loans and advances were up by 21 percent across 2022 to Sh283.6 billion from 234.2 billion in 2021 with the bank attributing the growth to a rise in secured lending and trade loans.

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