Banks notify IMF of CBK lending rate freeze


Banks notify IMF of CBK lending rate freeze

The central bank of Kenya, in Nairobi, on Sunday, November 22, 2020. PHOTO | DENNIS ONSONGO | NMG



  • Lenders accuse the regulator of being silent on rate hike proposals since the cap ended in 2019.
  • The regulator had asked banks to submit new loan pricing formulas that would serve as the basis for setting interest rates on new loans in an environment where the government did not control loan costs.

Many bank executives protested to the International Monetary Fund (IMF) over the reluctance of the Central Bank of Kenya (CBK) to approve lenders’ demands to increase the cost of loans following the removal of rate controls interest on loans on November 7, 2019.

The IMF on Thursday revealed protests from lenders amid the banking regulator’s accusation of capping lending rates after blocking their offer to raise the cost of loans.

The regulator had asked banks to submit new loan pricing formulas that would serve as the basis for setting interest rates on new loans in an environment where the government did not control loan costs.

Bank executives believe the CBK has been silent on some of the requests and has not approved their bids, forcing them to continue operating as if they are still under lending rate control to avoid getting into trouble with the regulator.

“Banks consider approvals could be speeded up,” the IMF said in reference to the CBK’s delay in approving the higher lending rates.

“Banks’ credit pricing models require CBK approval, and banks must justify charging higher rates to customers with higher credit risks,” the fund added.

Banks say the late move to risk-based lending has forced many to deepen their investments in government securities and restrict lending to high-quality clients with lower default risk.

This came at a time when the supply of loans to the private sector increased 7.8% in October, which is below the ideal rate of 12-15% needed to support economic growth.

“With sufficient capital and strong growth in deposits, banks are well placed to extend credit to the economy to support the recovery, even if they may face headwinds,” the IMF said.

“Banks’ holdings of government securities represent a relatively high level of 31% of assets and are expected to increase further in the coming year. “

The Fund says lending rates in Kenya have not changed much compared to the period when the costs of bank loans were controlled by the state.

Lending rates averaged 12.38% in November 2019, when the rate cap was lifted with the central bank (CBR) rate then at 8.5%.

In October, lending rates averaged 12.12 percent.

To play it safe, banks have cut average lending rates slightly in line with the cut in CBR, which has been cut to seven percent, underscoring the conundrum lenders find themselves in.

Banks have been quick to price loans to different customers based on their risk profile, but this flexibility remains a mirage after the CBK stepped in as the de facto cost-of-credit controller.

The government removed the cap after being accused of holding back credit growth in its three years of existence.

Banks use a base rate that is normally the cost of funds plus a margin and a risk premium to determine how much to charge a particular customer.

The cap, which sets rates four percentage points above the central bank’s benchmark loans for all customers, had done away with that equation and the flexibility lenders say they need to accommodate customers considered to be borrowers. risk.

The inability to assess loan risk rules out many potential borrowers as banks seek to reduce their exposure to the already large defaults caused by the Covid-19 pandemic.

The banking regulations (increase in the rate of bank charges and others) of 2006 oblige banks to seek the approval of the CBK when they modify the characteristics of any product, such as loans.

“Any change in the characteristics of the product modifies the product as it was previously approved and, therefore, the product modified with less, more or otherwise varied characteristics must be approved by the CBK before deployment”, recalled the CBK to banks in a 2016 circular.

The CBK has repeatedly warned banks against returning to punitive interest rates of over 20% in the post-rate cap regime and wants every lender to justify the margins it puts in its formulas.

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