The International Finance Corporation (IFC) has announced a technical assistance programme for the Central Bank of Kenya (CBK) and local banks to strengthen the recently introduced risk-based pricing mechanism for customer loans.
The programme, which has a budget of $514,345 (Sh72.7 million), will also see the IFC offer support to credit reference bureaus on how to provide better credit scores for small enterprises, use of alternative data for credit scoring and create awareness to borrowers on consumer protection practices.
The support represents the second phase of the IFC’s Kenya Credit Reporting Strengthening Project, which was put in place in June 2022 to help the local financial sector recover and stabilise from the effects of the Covid-19 pandemic.
“IFC will support the CBK to strengthen credit reporting supervision, and in their efforts to enhance lending policies and protect customers,” said the IFC about the programme that runs until December 2025.
“This project also supports the private sector through technical assistance to financial institutions such as banks to improve their internal rating models as a key component of compliance and risk-based pricing of credit”.
Banks have been adopting risk-based credit pricing as part of wider reforms that are aimed at improving access to credit.
The reforms entrenched in the Kenya Banking Sector Charter seek to instil fairness, transparency, financial literacy and financial access.
By the beginning of June, the CBK had cleared the risk-based pricing plans of 33 out of the 39 licensed commercial banks in the country.
All commercial banks had been required to submit plans for this kind of pricing by the end of May 2019.
The expectation is that allowing banks to price this way when lending to a customer will unlock more lending to the private sector.
It will also allow borrowers with good repayment records to access new loans at friendlier terms.
Other than strengthening the risk-based credit pricing plan, the project will also see the IFC provide technical support for the country’s credit information-sharing mechanism and MSMEs.
Credit access by the private sector has remained constrained in Kenya since 2016, when the introduction of a rate cap on custom loans constrained banks’ ability to cater for risk when lending.
The removal of the cap in November 2019, while boosting the single-digit credit growth into double digits, has failed to fully unlock access to the formal loans market for small businesses, amid competition from the government for funds.
The credit market was further hit by the Covid-19 pandemic, which caused massive job losses and closures of businesses, making it harder for borrowers to service loans and forcing banks to tighten credit conditions to protect their books.