Banks in long wait to alter interest rates

Banks are expected to wait longer to effect risk-based pricing to loans and advances to customers, a move set to alter interest rates on loans.

This is as the industry extends talks with the Central Bank of Kenya (CBK) before moving forward with the adoption of the model which loosely translates to offering different interest rates on loan terms to different customers based on their credit worthiness.

At present, banks have continued to impose interest rates nearly similar to those seen during the interest rate capping era despite the lifting of the upper ceiling in November of 2019.

Stanbic Bank Kenya Managing Director Charles Mudiwa says his bank has since switched back to a prime rate used before the interest rate caps.

“We implemented what we call a Stanbic Bank prime rate. This rate is driven by a number of components including our cost of funding and the Central Bank Rate (CBR),” he said.

“A lot of work is happening behind the scenes to build the models which will determine the price that customers can enjoy in the market. It’s a work in progress, I don’t think there is an end or timeline,” noted KCB Group Managing Director Joshua Oigara.

Nevertheless, according to Oigara, industry changes go beyond just pricing to incorporate transparency and simplicity by banks to their customers.

According to KCB Group Chief Finance Officer Lawrence Kimathi, the delay in the implementation of risk-based pricing is likely a factor of COVID-19 disruptions.

“I would say the delay is perhaps on the timing. Interest rate caps were only lifted in November 2019. Banks applied for the risk-based pricing in the first quarter of 2020 while the pandemic hit shortly after,” he said.

“Obviously implementing the model was not a priority anymore. If I was the regulator, I’d focus on the need for support to the economy and come up with measures to support banks which would in turn support customers.”

According to Equity Group Managing Director James Mwangi, the roll out of risk-based interest rates will be integral to credit provision for all banking customers at the end of ‘negotiations’ with the CBK.

“We are both concerned and focused on ensuring that private sector lending bounces back. The current lending rate cannot support a seven per cent GDP growth. We wish nobody is left behind in terms of access to credit,” he said.

“The ability to price the risk of every customer is a prerequisite to desired growth. We seem to have this understanding with the CBK.”

The looming operation of credit risk pricing has however caused jitters as many borrowers fear the model might give the leeway for higher interest rates.

This has seen skepticism by the public on banks intentions with many demonizing the industry.

However, Lawrence Kimathi says we are likely to see a return to the high interest rates with the potential return of interest caps serving as a deterrent to lenders.

“The expectation by many is that we will start to charge 20 per cent once handed the allowance and that the cost of credit goes up. This is not necessarily the case,” he added.

Currently, data from the CBK shows the weighted average rate for commercial banks loan and advances stood at 12.02 per cent in June.

More data analysis from the Kenya Bankers Association (KBA) total cost of credit website by Citizen Digital further mirrors the largely unchanged cost of loans.

A one-year personal secured term loan with a monthly repayment cycle for instance incurs an annual interest fee of 13 per cent respectively at KCB and Equity and 13.65 per cent at Stanbic Bank.

The CBK has previously affirmed ongoing discussions on interest rates charged by banks but is not expected to make any individual approvals on the rates.

“We did ask all commercial banks to provide us with their business models and have held discussions. There has been no business on issuing approvals. We have had good conversations and moved on,” CBK Governor Patrick Njoroge said on July 29.