More pain for borrowers as cost of loans hits new peak of 19pc

Credit Score Financial Banking Economy Concept. [Getty Images]

Banks have steeply increased the cost of loans with interest rates of up to 19 per cent, leaving their customers with a massive debt servicing burden.

The increments come at a time when the high cost-of-living is already squeezing Kenyans hard.

This follows the widespread adoption of the risk-based rating of loans by a majority of the country's nearly 40 banks.

The repeal of the interest rate cap regime in November 2019 set the stage for price hikes for borrowers.

A spot check by The Standard showed several banks have been writing to their customers, explaining the change under the new terms.

"Equity Bank Kenya received approval from the CBK (Central Bank of Kenya) to implement risk-based pricing when lending to customers," said Kenya's largest bank by customer number in one such notice to a customer.

"The new pricing model applies a reference rate (in this case Equity Bank reference rate currently at 12.52 per cent plus a margin currently at a maximum of 8.5 per cent) per annum."

Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit offered or extended to a particular consumer to reflect the risk of nonpayment of their loan by that consumer.

Information from a consumer report is often used in evaluating the risk posed by the consumer.

Banks are under the new regime expected to offer more favourable terms to consumers with good credit histories and less favourable terms to consumers with poor credit histories.

Bankers through their lobby yesterday defended the ongoing interest rate hikes under the new regime, saying the new model will allow the free flow of credit to those previously shunned by lending institutions as they were deemed risky borrowers albeit at a premium.

"Each bank developed its risk-based pricing model that required CBK approval before implementation,'' said Kenya Bankers Association (KBA) Chief Executive Habil Olaka.

"Most banks have by now received CBK approval and then proceed to implementation. During the capping period, there was credit rationing where a number of high-risk borrowers could not access credit because their risk profiles could not fit in the capped rates."

Olaka said banks will now be able to engage the segment of borrowers who could not access credit because banks were unable to appropriately price them.

"Henceforth (they) will be able to borrow as banks can price them, then there will be growth. However, prices have gone up in view of the global developments where most jurisdictions are on a monetary policy tightening stance, including Kenya, where interest rates are going up, credit is becoming expensive at the expense of credit growth," he said.

"The net effect is that the credit growth will be at best very soft. When the macros change and we see CBK through its Monetary Policy Committee (MPC) start reducing the Central Bank Rate (CBR), then the interest rates in the market will start coming down and consequently, credit will start again picking up."

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