Capital Markets

Bankers pressure CBK to approve risk-based loans

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The Central bank of Kenya, Nairobi on Sunday, November 22, 2020. PHOTO | DENNIS ONSONGO | NMG

Banks have asked the Central Bank of Kenya (CBK) to approve risk-based lending more broadly, noting the current situation gives little incentive to institutions to expand credit to riskier customers.

Kenya scrapped legal controls of credit charges on November 7, 2019. Banks were, however, stopped from re-pricing loans after the CBK stepped in administratively, requiring them to file new formulas for lending that have to be vetted.

Six banks have received approvals for risk-based lending and only Equity Bank has come to say it secured regulatory clearance.

The average lending rate in the banking sector stands at 12.15 percent, below the rate on risk-free medium-term to long-term government bonds.

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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.

“The existing slow approvals of risk-based pricing model proposals by banks continue to constrain lending … and remain a concern for the industry,” Kenyan Bankers Association said in a brief ahead of CBK’s Monetary Policy Committee meeting on Monday.

“Going forward, any efforts to boost credit extension to the private sector, and support the fragile economic recovery, requires as a necessary and sufficient condition, a stronger shift in the pricing conditions/frameworks to allow effective pricing of risk.”

Equity Bank said it was cleared to price loans at between 13 percent and 18.5 percent.

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KBA says the prevailing heightened credit risk, coupled with the rising inflation, implies that credit growth is at risk of being constrained further unless a stronger market-wide transition to risk-based environment is achieved.

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