Equity Group is considering switching to pricing loans based on the risk profile of customers. The lender and Central Bank of Kenya (CBK) are currently holding talks which according to those privy with the matter are close to sealing the deal.
James Mwangi the chief executive of Equity Group said Tuesday that the discussions with CBK are close to conclusion and the switch to risk-based lending will allow it to accommodate riskier customers.
“We have been in negotiations with the CBK and we are at the tail end of the negotiations,” said Mr Mwangi.
“We also wish nobody is left behind in terms of access to credit and the ability to price every risk is a prerequisite. We seem to have a common understanding with CBK and hope to complete those deliberations soon.”
Equity said it is now working on how to ensure the model is able to assess the risk of each customer and assign them a rate that is “fair”.
Private sector credit growth has remained below 10%, which Mr Mwangi says cannot support this year’s targeted economic growth rate of seven percent.
Banks usually use a base rate that is normally the cost of funds, plus a margin and a risk premium, to determine how much they should charge a particular customer.
Kenya scrapped legal controls of credit charges on November 7, 2019, prompting the CBK to ask lenders to submit new loan pricing formulas that would be the basis of setting interest rates.
CBK said last month that it had assessed the models of lenders and approved many while sending back others to revise theirs.
“We had those conversations with them and we have moved on with a lot of these banks. There has been some that had not done their work well so we asked them to revise,” said Patrick Njoroge, CBK governor.
Part of the discussions involve an explanation on factors that determine the pricing of loans such as the cost of funds, return on assets, operating costs and the risk premium relative to the non-performing loans.The CBK, which in 2019 warned banks against reverting to punitive interest rates of more than 20% in post-rate cap regime, wants every lender to justify the margins they put in their formulas. Businessdailyafrica
