Equity rates up on new loan pricing model


Equity bank on Muindi Mbingu Street in Nairobi's CBD. PHOTO | DENNIS ONSONGO | NMG

Riskier customers will pay up to 21.02 percent on Equity Bank’s loans after the lender commenced implementation of risk-based pricing of its credit facilities.

A notice sent to some of the lender’s customers shows that the country’s largest retail bank now has a base rate of 12.5 percent plus a maximum margin of 8.5 percent.

This means that borrowers can expect their loans to be priced starting from 12.5 percent all the way to 21.02 percent, depending on their creditworthiness.

Those with less reliable incomes or deemed likely to default will have their loan rates set at the upper end of the risk-pricing continuum.

“Equity Bank (K) LTD received approval from the CBK (Central Bank of Kenya) to implement risk-based pricing when lending to customers,” said the Nairobi Securities Exchange-listed firm in the notice.

“The new pricing model applies a reference rate (in this case Equity Bank Reference Rate, currently at 12.52 percent) plus a margin (currently a maximum of 8.5 percent) per annum.”

One customer, for instance, saw his existing credit facilities re-priced to 18 percent from the previous 13 percent, underlining the artificially low rates that had persisted when the regulator slowed down banks’ return to free market practices after the repeal of interest rate controls on November 7, 2019.

Equity Group’s chief executive James Mwangi told the Business Daily in November 2022 that the bank had been cushioning its customers from the impacts of Covid-19, through lending at 13.5 per cent.

Mr Mwangi said economic recovery from the pandemic and the rising global interest rates caused by inflation forced the activation of the risk-based pricing model.

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 fail to pay back their loans.

Banks using risk-based models to price their loans will consider the possibility of a customer defaulting, and its exposure to such a risk and loss given default.

Widespread adoption of risk-based lending will raise the cost of credit for most borrowers but is expected to incentivise banks to lend more as the increased returns will cover the risk of default by some customers.

Kenya Bankers Association earlier said the prevailing heightened credit risk, coupled with the rising inflation, implied that credit growth is at risk of being constrained unless a stronger market-wide transition to a risk-based environment is achieved.

As of last November, the CBK had approved formulas for pricing of risks from more than half of the industry’s 39 lenders, setting in motion the return of a model where interest rates vary based on the likelihood of a borrower defaulting on repayment.

Risk-based lending is the latest development that is expected to further lift bank earnings, adding to the institutions’ resumption of charges on bank-to-mobile transactions.

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