Commercial banks are in talks with the Central Bank of Kenya (CBK) for an overhaul of their loan pricing models and come up with a common base lending rate amid concerns that they are not cutting interest rates in line with the decline in the Central Bank Rate (CBR).
The lenders have sent proposals to the CBK Governor Kamau Thugge, arguing that the current models are sticky and have made it difficult for them to adjust rates downwards as soon as the regulator lowers CBR.
Stanbic Bank Kenya and South Sudan CEO Joshua Oigara, who sits on the Kenya Bankers Association (KBA) governing council, said Wednesday the industry is rooting for a return of a common base rate for the industry in what will mirror the Kenya Bankers Reference Rate (KBRR) that was phased out in 2016.
“In terms of risk-based pricing, it is more of a difficult question. We are all as an industry disagreeing with the Central Bank of Kenya around risk-based pricing, but remember, we are the one who created the models and got them approved,” said Mr Oigara.
“Sitting at the (KBA) governing council, we are positioning with the regulator to make amendments and review the risk-based pricing this year across industry…We believe that we need a reference rate, and it is something that is being engaged at industry level, more like your SOFR (secured overnight financing rate)-based model for foreign currency loans.”
Dr Thugge’s team has stepped up surveillance on banks, warning of penalties on those that were not reducing lending rates in line with their models and falling CBR.
However, banks have been reluctant to offer cuts equivalent to the four CBR cuts that CBK has made in six months.
Mr Oigara said the current risk-based pricing models are “not sensitive enough” to changes in CBR. The models take into account components such as the CBR, return on equities, customers’ risk profile and banks’ margin —all being averaged over a 12-month period.
“Our regulator feels that banks are not going fast enough on the cuts. The bottleneck is that the pricing model we have today is not sensitive enough to the market changes. That is where the real problem is,” he said.
The planned overhaul of the models comes barely two and half years after the industry got approvals to start applying these models after switching from the interest rate cap regime.
According to Mr Oigara the overhaul will remove the standoff between banks and CBK, where the regulator has accused banks of keeping lending rates high despite four CBR cuts in six months.
“Whereas I agree with the views that we have not acted as much [in cutting rates], what we have done, we have acted within the approved models which were approved by the CBK. So the way to fix this is to reshape and reset the risk pricing models across the industry.”
CBK is expected to have a final say on whether to grant banks their way at a time the flow of credit to the private sector has remained subdued, posting a negative growth for the first time since 2002.
