The Central Bank of Kenya (CBK) has frozen a push by big banks to raise the cost of loans for borrowers presenting higher credit risks, drawing protests from the lenders.
The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates in an environment where the government stopped controlling loan costs.
The Business Daily has established that the banking regulator is yet to give the nod to six of the nine tier-1 banks — Co-operative Bank, NCBA, KCB, Diamond Trust Bank, Standard Chartered and I&M Bank —nearly three years after lenders submitted their applications.
The six, who account for more than half of all loans, reckon that the CBK freeze has forced them to continue operating as if they were still under lending rate controls.
The regulatory freeze has shielded the majority of borrowers, in particular small traders and workers in the informal sector, from expensive credit.
Banks say that the delayed shift to risk-based lending has forced many of them to deepen investment in government securities and restrict lending to high-quality customers with a lower risk of default.
So far, the CBK has allowed 24 of Kenya’s 39 banks to increase their lending rates based on borrowers' risk profiles, but a majority of the approved lenders are small banks like Victoria Commercial Bank, Paramount Bank, Credit Bank and the Middle East Bank.
Equity Bank Kenya, Absa and Stanbic Bank are the only tier-one banks to get the CBK nod, according to data from the Kenya Bankers Association (KBA)—the industry lobby.
Lending rates for the high-risk groups can rise by up to 8.5 percentage points, with loan costs for this category of borrowers topping 21.02 percent compared to a base rate of 12.5 percent.
Banks have been eager to price loans to different clients based on their risk profile but this flexibility remains a mirage after the CBK stepped in as the de facto controller of the cost of credit.
The Banking (Increase of Rate of Banking and Other Charges) Regulations of 2006 require banks to seek the CBK’s approval any time they are changing features of any product such as loans.
The government removed the cap on lending in November 2019 after it was blamed for curbing credit growth during its three years of existence.
Banks use a base rate which is normally the cost of funds, plus a margin and a risk premium, to determine how much they should charge a particular customer.
The cap, which set rates at four percentage points above the central bank’s benchmark lending for all customers, had taken out that equation and the flexibility that lenders say they need to accommodate customers deemed as risky borrowers.
The inability to price risk in lending is shutting out many prospective borrowers as banks seek to reduce their exposure from already large defaults brought by the Covid-19 pandemic.
The CBK has previously said the delay in approving the risk models was not a cause for alarm.
“This [the approval of banks for risk-based pricing] has been ongoing. This story was overblown in the past. We have been working with banks, going back and forth with them,” CBK Governor Patrick Njoroge said earlier.
“More than half of the banks have already had their risk-based models approved or signed off with us. For others, we are at different levels of completeness but again, we know what we need to insist on is making sure that the models are realistic and not just some sought of class project. Issues that were raised before were somewhat overblown.”
Multiple bank executives earlier protested to the International Monetary Fund (IMF) over the CBK’s reluctance to approve lenders' applications to raise the cost of loans following the scrapping of lending rate controls on November 7, 2019.
The bankers' lobby reckons that risk-based pricing is mostly applied on new loans, with the risk metrics being assessed from credit demand and sectors presenting inherent risks for defaults.
“Most banks are implementing risk-based pricing on new and not old loans. [On the application of risk metrics] it depends on the assessment of the demand for credit on each segment and how the same loans are performing, which is weighed against the prevailing environment,” said KBA Head of Research Samuel Toriongo.
He added that loan facilities to sectors such as agriculture would presently attract a higher risk premium in the wake of the worst drought in 40 years.
The push for broader use of risk-based lending comes as the cost of bank loans hit a 52-month high in December in the wake of the CBK rate hikes and rising yields on government paper.
Data from the CBK show the average lending rate rose to 12.67 percent in December from 12.22 percent in May last year when the banking regulator first raised rates in nearly seven years.
This is the highest average lending rate since August 2018 when it stood at 12.78 percent which could hobble corporate investment and put home loans and other credits out of the reach of many individuals.