The Central Bank of Kenya (CBK) has given approval to 33 out of 39 commercial banks to implement lending based on customers’ risk profiles. This means that these approved banks will be able to charge higher interest rates to riskier borrowers compared to those with better creditworthiness, outgoing Central Bank of Kenya Governor Patrick Njoroge said this May 31.
The CBK has been reviewing the pricing models of individual banks for the past three years and will now focus on overseeing the implementation of these models as the approved lenders start using the new loan-pricing metrics. The names of the individual banks that have received approval were not disclosed, but it is likely that most of the tier-I banks have been included.
Previously, large banks, such as Equity Bank, Stanbic, and Absa Bank Kenya, were mainly sidelined in the initial approvals. However, smaller institutions like Victoria Commercial Bank, Paramount Bank, Credit Bank, and Middle East Bank have been cleared.
The approval for risk-based credit pricing is expected to increase bank earnings from interest income by allowing commercial banks to adjust interest rates upwards and serve riskier borrowers who would have otherwise not qualified for bank loans.
The introduction of risk-based credit pricing is part of broader reforms initiated by the CBK to regulate banks following the removal of interest rate caps in 2019. These reforms aim to promote fairness, transparency, financial literacy, and financial access in the banking sector.
All commercial banks were required to submit their plans for risk-based pricing by the end of May 2019.
