Bankers pressure CBK to approve risk-based loans

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Bankers pressure CBK to approve risk-based loans

The Central Bank of Kenya, Nairobi, on Sunday November 22, 2020. PHOTO | DENNIS ONSONGO | NMG

The banks have asked the Central Bank of Kenya (CBK) to approve risk-based lending more widely, noting that the current situation offers little incentive for institutions to extend credit to riskier customers.

Kenya removed statutory controls on credit charges on November 7, 2019. Banks, however, were prevented from reassessing loans after the CBK administratively intervened, requiring them to file new loan forms which must be verified.

Six banks received approvals for risk-based lending and only Equity Bank came forward to say it had obtained regulatory clearance.

The average lending rate in the banking sector is 12.15%, lower than the rate on medium and long-term risk-free government bonds.

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Widespread adoption of risk-based lending will increase the cost of credit for most borrowers, but should incentivize banks to lend more, as the increased yields will cover the risk of some customers defaulting.

“The current slow pace of approvals of risk-based pricing model proposals by banks continues to constrain lending…and remains a concern for the industry,” the Kenya Bankers Association said in a brief ahead of the meeting of the Board. CBK monetary policy committee on Monday.

“Going forward, any effort to stimulate credit provision to the private sector and support the fragile economic recovery requires, as a necessary and sufficient condition, a stronger change in pricing conditions/frameworks to allow for efficient pricing of risk”.

Equity Bank said it was allowed to price loans between 13% and 18.5%.

ALSO READ: CBK lifts freeze on bank lending rates after IMF advice

According to KBA, the prevailing increased credit risk, coupled with rising inflation, means that credit growth is likely to be further constrained unless there is a stronger market-wide transition to an environment based on the risk is carried out.

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