The Central Financial institution of Kenya (CBK) has proposed scrapping the risk-based credit score pricing mannequin in favor of pegging lending charges to its benchmark coverage charge, a significant shift aimed toward decreasing borrowing prices and enhancing entry to credit score for households and companies.
The choice follows frustration throughout the CBK over the banking sector’s reluctance to decrease rates of interest regardless of a number of reductions within the benchmark lending charge since October 2024. The CBK lately lower the Central Financial institution Price (CBR to stimulate lending and financial exercise, however banks have largely maintained excessive lending charges, citing inside danger assessments.
“CBK proposes using the coverage charge (Central Financial institution Price) because the widespread reference charge for figuring out lending charges within the Kenyan banking sector,” CBK mentioned on Wednesday.
“The lending charges shall be decided by including a premium to the CBR. CBK will publish the elements of every financial institution’s lending charge premium on its web site, the Whole Value of Credit score (TCC) web site, and in two newspapers of nationwide circulation.”
Rates of interest shall be set by including a premium—“Ok”—to the Central Financial institution Price (CBR). The premium will embrace the financial institution’s working prices tied to lending, the return anticipated by shareholders, and the borrower’s danger profile.
The outgoing risk-based pricing mannequin, which allowed banks to determine on mortgage charges relying on particular person borrower profiles, has confronted criticism for being opaque and susceptible to abuse. When it was launched in 2019, the regulator supposed to encourage lending to riskier prospects; in apply, it has resulted in prohibitively excessive charges, particularly for SMEs and households with out credit score histories.
“CBK’s expectation of the risk-based mannequin was to advertise accountable lending practices by aligning credit score pricing with debtors’ danger profiles whereas making certain transparency and equity,” the regulator mentioned.
Underneath the mannequin, banks mixed the bottom charge as a reference charge with risk-adjusted elements, resembling a borrower’s creditworthiness, collateral, and total monetary behaviour.
By pegging rates of interest on CBR, the Central Financial institution of Kenya hopes to enhance the transmission of financial coverage choices to debtors and push for transparency in a market that has been criticised for opacity. For debtors, it may imply decrease and predictable rates of interest.
