The Central Bank of Kenya (CBK) has cleared all 38 banks’ risk-based pricing models, allowing lenders to price loans differently based on a borrower's likelihood of default.
The regulator's nod clears the way for all institutions to implement their respective interest rate-setting models even as some banks refine their models on specific lending niches.
“Presently, all banks' risk-based models have now been approved. The current discussions with the central bank are on how to refine them. Initially, some of those models were not encompassing all loans, for some banks, some foreign currency and digital loans were not part of the model,” Kenya Bankers Association (KBA) acting Chief Executive Officer Raimond Molenje said.
Risk-based lending was introduced gradually, with Equity Bank Kenya among the first to implement it from late 2022 as CBK took time to review proposals by lenders on how they were to price their loans to clients with different probabilities of default.
The adoption of risk-based lending followed the removal of interest rate caps which were in force between August 2016 and November 2019, after public concerns on the fairness of borrowing costs.
Kenya’s Parliament passed a law amending the Banking Act, introducing a cap on interest rates at four percent above the Central Bank Rate (CBR).
Under risk-based lending, banks use various resources including information from credit reference bureaus to set up a credit scoring system.
Equity Bank Kenya became the first lender to implement the risk-based pricing model and has provided a range on its interest rate range. The lender has an 8.5 percent interest rate margin for its Kenya shilling denominated credit facilities.
The bank revised its benchmark interest rate --the Equity Bank Reference Rate (EBRR)-- earlier this month from 18.24 percent to 17.83 percent. It set the highest interest rate at 26.33 percent from 26.74 percent previously.
The banking industry is betting on the full implementation of risk-based pricing to comply with a June ruling by the Supreme Court, which asked banks and other financial institutions to seek the approval of the National Treasury Cabinet Secretary ()CS) before increasing interest rates.
The KBA says interest rates backed by CBK-approved risk-based lending models would equate to charges approved by the exchequer.
“This conversation becomes very key because at some stage in June, there was a Supreme Court judgement that said banks ought to be getting approvals from the CS through the CBK. In compliance, this framework comes in quite handy,” Mr Molenje said.
