CBK warns banks against ignoring sector reforms


CBK warns banks against ignoring sector reforms

In Summary

  • The warning by the reserve bank stems from its self-assessment of the industry’s poor adoption of credit risk pricing contained in the 2019 Banking Sector Charter which came into being in March last year
  • The flagging of banks represents betrayal of the commitment by the institutions to entrench responsible and disciplined banking which encompasses customer centric models, risk based credit pricing and transparency in disclosures
  • The CBK on boarded the Banking Sector Charter as it sort to walk the banking industry back into order following rampant customer complains which culminated in the enactment of interest rate caps in September of 2016

The Central Bank of Kenya (CBK) has cautioned banks against ignoring the implementation of recent sector reforms terming the downplay as a risk to the existence of the local financial system.

The warning comes as the reserve bank notes the disregard of new banking metrics such as the adoption of credit risk pricing as contained in the 2019 Banking Sector Charter.

“There is perceived reluctance among commercial banks to fully embrace credit scoring methodologies,” said CBK Deputy Governor Sheila Mbijiwe.

The deputy CBK governor traces the banks attachment of little importance to the banking charter’s pillar to the inheritance of a dominant banking system consisting of large power welding institutions who lack the incentive to move in tune with the changing times.

Even so, Mbijiwe cautions banks against being trapped in ancient business models in an increasingly competitive global financial system.

“If we continue like this, big banks will come into our country and take over by offering credit at cheap rates which local banks can’t contend with,” she added.

“The future is no longer about fewer customers and wider margins. The Kenyan financial market must move quickly towards the direction of more customers and shallow margins for it to survive.”

The flagging of commercial banks represents betrayal of the commitment from the institutions to entrench responsible and disciplined banking which encompasses customer centric business models, risk based credit pricing and transparency in information disclosures.

The CBK enforced the Banking Sector Charter in 2018 as it sort to walk the banking industry back into order following rampant customer complains which culminated in the enactment of interest rate caps in September of 2016.

The pursuit of sector reforms by the reserve bank led to the eventual repeal of interest rate caps on commercial lending at the end of 2019 with the Banking Sector Charter resolutions assuring of a turnaround in the behaviour by banks.

As such, the CBK is keen to see the enforcement of the Charter by banks as it seeks to transition the industry into a new era of consumer prioritization.

“We are back with this opportunity to enhance the ability of which we present credit information scoring to create an enabling environment for all to access well priced credit,” Mbijiwe told delegates at the fifth Credit Information Sharing (CIS) Conference.

On their part, Credit Rating Bureaus (CRBs) are keen to see the embracing of credit risk pricing models by banks as they too face the tough task of demystifying their roles to Kenyans.

“We would want a situation where everyone economically engaged has a credit score which should in return be used to determine the pricing of loans by lenders,” said the Chairman to the CIS Centre Charles Ringera.

CRBs have had a dark history having first premiered as black-listing sites for loan defaulters.

Nevertheless, the units have had a positive influence on banks’ profits before tax (PBT) by taming the exponential growth of non-performing loans (NPLs) in the 90’s through the creation of information symmetry on borrowers.

Credit information sharing remains as pivotal in the present as asset quality concerns remain sustained with the industry’s gross non-performing loans standing at Ksh.316.7 billion at the end of 2018 as per CBK data.

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