A credit rating firm wants the Central Bank of Kenya (CBK) to compel commercial banks to publicly disclose the average risk premiums on their loans under a new credit pricing model.
Augusto & Co, one of four local rating agencies, wants Kenyan banks to publish the average of their risk premium — labelled as ‘K’ — in addition to the base lending rate recently unveiled by the CBK.
Under the new model, the total lending rate will be the interbank rate plus a premium, or K, which will be different for each borrower.
The interbank market rate refers to the rate at which commercial banks borrow and lend money to each other on a short-term basis and is widely relied upon as a gauge of the market's liquidity.
The premium K will be a factor of a bank’s operating costs related to its lending business, the expected return to shareholders, and the borrower’s risk premium.
While the risk premium is tailored to each customer, Augusto wants banks to calculate and publish their average premiums so customers can compare the cost of lending across banks.
“If you look at the United Kingdom, one of the things that is required is that banks must publish the weighted average premium for customer comparison,” said Yinka Adelekan, the managing director Augusto & Co, in a press briefing on Thursday.
“So customers with lower risk must have a lower interest rate compared to customers with higher risks. In the UK, they have to disclose this.”
The interbank rate has limits in terms of volatility because it operates within limits fixed on the CBK benchmark rate to ensure the benefits of monetary policy are transmitted to the real economy.
The limit current stands at plus or minus 75 basis points of CBR.
This means that the interbank rate cannot rise above 0.75 percentage points of the Central Bank Rate (CBR) of 9.5 percent or a maximum of 10.25 percent, and not less than 8.75 percent.
CBK has renamed the interbank to Overnight Interbank Rate to Kenya Shilling Overnight Interbank Average (Kesonia), which now stands at 9.2476 percent.
CBK officials note that disclosures based on Kesonia will start being published next month as the country transitions into the new lending framework.
Kenya Bankers Association Head of Research Samuel Tiriongo said all banks will be ready to roll out the new pricing regime anchored on Kesonia at the end of this month. The total cost of the credit portal will be revamped to cover more facilities beyond mortgages and personal loans.
“By November 30, all banks should have their models ready and approved. The beauty is that this time, only the board is approving the framework. Once the board approves, each bank can proceed to implementation,” Dr Tiriongo said.
“All banks have to publish the average premiums for all products that they have within their books.”
The financial regulator replaced the CBR with Kesonia after it emerged that commercial banks were not passing on the benefits of lower policy rates to borrowers.
Each commercial bank must design a risk-based credit-pricing model and related policies and procedures within three months of CBK issuing the final revised framework and obtain board approval.
Banks must submit their board-approved model, policies and procedures to CBK within 15 days of board sign-off and no later than 15 days after the three-month deadline.
Although banks have begun publishing average lending rates, analysts fear many may withhold the weighted-average premium (‘K’), hiding the true cost of credit and possibly masking negative premiums.
Ms Adelekan noted that in Sub-Saharan Africa — in Morocco and South Africa — banks publish the weighted risk premium.
“The (Kenyan) banks have to be transparent. They have to move from collateral-based lending to now look at entities based on their creditworthiness and their capacity to meet obligations,” she said.
She added that banks should have an internal scoring model to assess counterparties.
Besides Augusto, other rating agencies licensed by the Capital Markets Authority (CMA) include Metropol Corporation Limited, Global Credit Rating Company, A.M. Best Rating Services Limited, and CARE Ratings.
