Capital Markets

CBK clears 33 banks for risk-based loans


Absa Bank along Muindi Mbingu Street in Nairobi. FILE PHOTO | EVANS HABIL | NMG

The Central Bank of Kenya (CBK) has given the nod to 33 out of 39 commercial banks to implement lending to customers based on their risk profile.

Riskier borrowers are charged higher interest rates compared to those with better creditworthiness.

The apex bank which has been reviewing the pricing models of individual banks for the past three years says it will now be focusing on overseeing the models implementation as the approved lenders move to effect the new loan-pricing metrics.

Read: Banks take gradual steps to risk-based lending

“We have engaged banks individually on their pricing models and have so far concluded these discussions with 33 of 39 banks and they have proceeded with rolling out their risk-based credit pricing models and we will be reporting their implementation,” CBK Governor Patrick Njoroge said on Wednesday.

While the apex bank did not disclose the names of individual banks with the nod, the approvals likely include most of tier I banks after the large lenders were mainly sidelined in initial approvals.

Of the 22 banks with CBK’s nod as of March this year, the large institutions comprised of only Equity Bank, Stanbic and Absa Bank Kenya.

Other banks that have been cleared are small institutions such as Victoria Commercial Bank, Paramount Bank, Credit Bank and Middle East Bank.

KCB disclosed the receipt of CBK risk-based pricing approval at the end of March for its two local subsidiaries- KCB Bank Kenya and NBK and listed the green light as a tailwind for growth this year.

Banks with an early approval for risk pricing were however hesitant to implement their models until this year with most drawing cushion to what had been a tough operating environment for borrowers.

At the beginning of this year, Absa said it would implement the risk pricing model in the second half of 2023 despite obtaining CBK approval for risk based pricing midway through last year.

The broad approval for risk-based credit pricing is expected to lift bank earnings from interest income by allowing commercial banks to adjust interest rates upwards and accommodate riskier borrowers who would have otherwise not qualified for bank loans.

Risk-based credit pricing is part of wider reforms propagated by the CBK to rein in the operations of banks following the lifting of interest rate caps in 2019.

The reforms entrenched in the Kenya Banking Sector Charter seeks to instill fairness, transparency, financial literacy and financial access.

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

By being fair for instance, the Charter envisions to reward good borrowers with lower interest rates while applying higher interest rates on riskier borrowers.

All commercial banks had been required to submit their plans for risk based pricing by the end of May 2019.

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