The Central Bank of Kenya (CBK) has blocked some banks from raising interest rates under the new risk-based pricing model.
Yesterday, CBK Governor Patrick Njoroge said the apex bank had rejected several banks’ request to revise their interest rates upwards as it did not bode well with the Banking Charter.
“So, yes, they (the banks) come to us and we talk to them. We review (their risk-based models) and if they don’t show how their homework is done, we send them home to explain how they work,” Dr Njoroge said during a post-Policy Committee briefing. currency (MPC).
“You can’t just give us an answer. You have to show us your work,” he added.
Banks have blamed the regulator for not approving their models, which has seen their lending margins shrink.
The risk pricing model, which was one of the conditions imposed on banks after the repeal of the interest rate cap in 2018, takes into consideration various factors, including the credit rating of borrowers and the likelihood of default.
The cost of loans has barely increased since 2018 after parliament repealed interest rate caps that had been imposed on all loans banks charged customers.
Banks charged borrowers an average of 12.12% for loans they took out in October last year, a far cry from the peak of 13.86 during the rate cap period.
Despite the removal of the interest rate cap, borrowers continued to enjoy favorable lending rates at an all-time high of 11.92% in April 2020.
Njoroge, who said the implementation of the risk-based pricing model was underway, noted that the regulator had to refuse several requests for interest rate revisions.
“There is no timetable. They have to do it quickly. They have to do it to our satisfaction,” he said.
“We’ve been in this space for a while. We’ve been in this space in terms of strengthening the framework that banks use. Indeed, we talked about the new normal in 2018.”
The CBK has committed all banks to develop a pricing model based on credit risk, a key pillar of the Banking Sector Charter. In addition to risk-based pricing, banks also needed to put customers at the center of their services.
Unlike before, banks cannot arbitrarily raise interest rates.
Parliament agreed to remove the interest rate cap in November 2018. However, this was on the condition that banks price their loans according to the risk of the borrower. Those who are likely to default should be priced differently than those who pay off their debts quickly.
Some fear that allowing some banks to raise interest rates could see more Kenyans default on their loans due to the continued ravages of Covid-19 on the economy.
Despite low net margins, bank profits have been rising, with their gross profits in the first 10 months of 2021 exceeding what they achieved in 2019, a pre-pandemic year. This was made possible by lenders expanding their net interest – the difference between what they charge borrowers and what they pay depositors