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Central Bank thwarts new push by banks to raise interest rates

By Dominic Omondi | Jan 28th 2022 | 3 min read
By Dominic Omondi | January 28th 2022

The Governor of the Central Bank of Kenya Patrick Ngugi Njoroge addresses journalists during a media conference [Courtesy]

The Central Bank of Kenya (CBK) has been blocking some banks from raising interest rates under the new risk-based pricing model.

Yesterday, CBK Governor Patrick Njoroge said the apex bank had turned down the request by several banks to review their interest rates upwards as it did not augur well with the Banking Charter.

“So, yes, they (banks) are coming to us and we are talking to them. We examine (their risk-based models) and, if they don’t show how their homework is done, then we send them home to explain their workings,” said Dr Njoroge during a post-Monetary Policy Committee (MPC) briefing.

“You cannot just give us an answer. You need to show us your working,” he added.

Banks have faulted the regulator for not approving their models, which has seen their margins on loans narrow.

The risk pricing model, which was one of the conditions banks were given after the repeal of the interest rate cap in 2018, takes into consideration various factors, including borrowers’ credit rating and the probability of default.

The cost of lending has hardly increased since 2018 after Parliament repealed the interest rate caps that had been placed on any loans banks charged customers.

Banks charged borrowers an average of 12.12 per cent for loans they took in October last year, a far cry from a high of 13.86 during the rate-cap period.

Despite the scrapping of the interest rate cap, borrowers have continued to enjoy favourable lending rates at a record low of 11.92 per cent in April 2020.

Njoroge, who said implementation of risk-based pricing model has been ongoing, noted that the regulator has had to turn down several requests for a revision of interest rates.  

"There is no timeline. They need to do it quickly. They need to do it to our satisfaction,” he said.

"We have been in this space for some time. We have been in this space in terms of strengthening the framework that banks use. Indeed, we talked about the new normal back in 2018.”

CBK engaged all banks to develop a Credit Risk-Based Pricing Model, a key pillar of the Banking Sector Charter. Besides risk-based pricing, banks were also to put customers at the centre of their services.  

Unlike before, banks cannot arbitrarily raise interest rates.

Parliament agreed to remove the interest rate cap in November 2018. However, this was on the condition that banks price their loans based on the risk of the borrower. Those who are likely to default should be priced differently from those who promptly pay their debts.

Some fear allowing some banks to increase interest rates might see more Kenyans default their loans due to the ongoing ravages of Covid-19 on the economy.

Despite the low net margins, banks’ earnings have been on the rise, with their gross profits in the first 10 months of 2021 surpassing what they made in the full year of 2019, a pre-pandemic year. This has been made possible by the lenders widening their net interest - the difference between what they charge borrowers and what they pay depositors

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