The Central Bank of Kenya (CBK) has frozen a push by big banks to raise the cost of loans for borrowers presenting higher credit risks, drawing protests from the lenders.
The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates in an environment where the government stopped controlling loan costs.
The Business Daily has established that the banking regulator is yet to give the nod to six of the nine tier-1 banks — Co-operative Bank, NCBA, KCB, Diamond Trust Bank, Standard Chartered and I&M Bank —nearly three years after lenders submitted their applications.
The six, who account for more than half of all loans, reckon that the CBK freeze has forced them to continue operating as if they were still under lending rate controls.
The regulatory freeze has shielded the majority of borrowers, in particular small traders and workers in the informal sector, from expensive credit.
Banks say that the delayed shift to risk-based lending has forced many of them to deepen investment in government securities and restrict lending to high-quality customers with a lower risk of default.
So far, the CBK has allowed 24 of Kenya’s 39 banks to increase their lending rates based on borrowers' risk profiles, but a majority of the approved lenders are small banks like Victoria Commercial Bank, Paramount Bank, Credit Bank and the Middle East Bank.
Equity Bank Kenya, Absa and Stanbic Bank are the only tier-one banks to get the CBK nod, according to data from the Kenya Bankers Association (KBA)—the industry lobby.
Lending rates for the high-risk groups can rise by up to 8.5 percentage points, with loan costs for this category of borrowers topping 21.02 percent compared to a base rate of 12.5 percent.
Banks have been eager to price loans to different clients based on their risk profile but this flexibility remains a mirage after the CBK stepped in as the de facto controller of the cost of credit.
The Banking (Increase of Rate of Banking and Other Charges) Regulations of 2006 require banks to seek the CBK’s approval any time they are changing features of any product such as loans.
The government removed the cap on lending in November 2019 after it was blamed for curbing credit growth during its three years of existence.
Banks use a base rate which is normally the cost of funds, plus a margin and a risk premium, to determine how much they should charge a particular customer.
The cap, which set rates at four percentage points above the central bank’s benchmark lending for all customers, had taken out that equation and the flexibility that lenders say they need to accommodate customers deemed as risky borrowers.
