CBK lifts freeze on bank lending rates after IMF notice

Central Bank of Kenya

The Central Bank of Kenya has begun approving lenders’ applications to increase the cost of loans based on customer risks, setting the stage for expensive credit for small traders and workers in the informal sector.

Equity Bank is the first lender to publicly reveal that the CBK has approved the risk element in its lending formula, pricing its loan at between 13 percent and 18.5 percent compared to the current average of 13.5 percent.

Multiple bank executives had last protested to the International Monetary Fund (IMF) over the CBK’s reluctance to approve their applications to raise the cost of loans following the scrapping of interest rate controls on November 7, 2019.

Banks have been eager to price loans to different clients based on their risk profile but this flexibility remained a mirage after the CBK stepped in as the de facto controller of cost of credit.

Equity Bank on Monday said the regulator had approved its risk lending models following two years of talks, indicating CBK has now started allowing banks to gradually raise rates.

“Interest on loans will now be based on the risk of the client. We are using sovereign risk as the base, then adding the risk of the individual sector and then within the sector the specific client risk and then we add operational costs,” Equity Bank chief executive James Mwangi said.

“So instead of the previous [pricing model] where we had loan appraisal fees, and all the rest, we are now saying here is one rate of interest and it is annualised and on reducing balances. We have simplified and removed the fees and combined the rate into one based on the sovereign risk.”

Mr Mwangi said the new pricing model will have base of 13 percent, which matches the average rate charged on government bonds of over five years

Small businesses will get loans at between 14 percent and 16 percent rate from Equity Bank while unsecured loans will attract as much as 18 percent.

“There are corporates like the blue chip firms which will be able to get as low as the sovereign rates. those with higher risk will go all the way to 16 percent, then there is the SMEs from 14 percent to 16 percent. The unsecured individual lending micro, small and medium enterprises from 16 percent to 18 percent,” Mr Mwangi added.

Other tops banks such as Cooperate Bank , KCB Group and NCBA Group remained tightlipped on their […]

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