Recent reports of commercial lenders pressuring the Central Bank of Kenya to approve risk-based loan pricing could be sweet music to the shareholders and senior management in the banking sector.
However, the same may ring an onset of prohibitive lending regimes in instances where the banks view a client as ‘riskier’ based on their financials, collaterals submitted, account performance and qualitative firm factors, among other considerations.
Before interest rate capping, the cost of lending based on risk was largely punitive and sometimes a source of pain to Individuals and micro, small and medium-sized enterprises that were largely viewed as ‘riskier’ clients to do business with.
With the push to go back to risk-based lending, banks will probably resort to predatory lending to maximise returns to shareholders and afford senior management high executive performance bonuses. On the flip side, auctioneers’ hammer will be falling on businesses and individuals not able to support loan repayments.
With the likely continued increase in the Central Bank Rate given the growing levels of inflation, a strengthening greenback against the Kenya shilling, increasing geopolitical risks with Russia and Ukraine at war and government activity in the domestic borrowing market due to growing fiscal deficit, it is imminent that risk-based lending may allow banks to always review their rates upwards at the behest of smallest movements in key variables detecting loan pricing.
Affordable loan pricing remains key to accelerating economic output and growth. With the ever-increasing cost of doing business, financing costs and repayments if not checked may easily prompt defaults, closure of businesses, loss of assets and entrepreneurial efforts.
The banking sector’s performance post-Covid-19 projects a stable and resilient banking sector with an economic rebound post-pandemic associated with the growth in bottom lines. A review of the CBK Annual Report for 2021 indicates that total net assets in the banking sector grew by 11.4 percent from Sh5.4 trillion in December 2020 to Sh6 trillion in December 2021, with the growth being supported by the increase in loans and advances.
The pre-tax profit for the sector increased by 75.8 percent from Sh112.1 billion in December 2020 to Sh197.0 billion in December 2021. Gross loans increased by 8.3 percent from Sh3,006.1 trillion in December 2020, to Sh3,255.4 trillion in December 2021.
The liquidity ratio stood at 56.2 percent as of December 2021, higher than the liquidity ratio in December 2020 of 54.5 percent. The ratio of non-performing loans declined from 14.5 percent in December 2020, to 14.1 percent in December 2021.
Going by the performance and increasing banking sector profits, the push to risk-based lending may be occasioned by high liquidity banks holding above the statutory minimum. A further dissecting of the banking sector performance reveals that large banks control 86.9 percent of the total pre-tax banking profits with medium and small-sized banks controlling a combined paltry 13.1 percent.
KCB Bank, Equity Bank and Cooperative Bank have come out strongly in agitating for CBK approval to allow risk-based lending based on the proposed lending formulae. The same banks control the largest share of pre-tax profits with the other six banks.
Whereas risk-based lending may allow banks to lend to ‘riskier’ borrowers, there is a need to ensure that the loan pricing regime remains certain. Uncertainty in loan pricing only means expensive loans that may give banks super normal profits at the expense of rewarding entrepreneurial efforts and pursuing economic growth as a country.
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