Banks to put a risk premium on loans in cap law change

Treasury chief administrative secretary Nelson Gaichuhie (left) and Kenya Deposit Insurance Corporation CEO Mohamud Ahmed Mohamud on May 9, 2018 when they announced a risk model review. PHOTO | SALATON NJAU | NMG 

By BRIAN NGUGI

More by this Author

Summary

• Treasury chief administrative secretary Nelson Gaichuhie said at a banking forum in Nairobi that the proposed new loan pricing model being mulled over by the Treasury will include a flat base rate but an additional risk component allowing banks to differentiate rates for different customers based on risk.
• The Consumer Federation of Kenya (Cofek) said the proposed pricing model amounts to giving banks the leeway to set own high rates.

Commercial banks will be allowed to put a risk premium on customer loans for self-assessed probability of default in planned amendments to the rate cap law.

Treasury chief administrative secretary Nelson Gaichuhie said at a banking forum in Nairobi that the proposed new loan pricing model being mulled over by the Treasury will include a flat base rate but an additional risk component allowing banks to differentiate rates for different customers based on risk.

“Banks know their customers (and) they shall be able to put a small margin on the flat rate (based on their risk assessments,” he said.

“We want to come up with a flat rate and risk-based component,” he added without divulging details.

READ: Rotich says plan for rate cap law repeal in Budget

The proposed amendments have elicited sharp reaction from various quarters opposed to the move, with some saying banks will abuse the risk component to inflate the cost of loans.

“Parliament will resist any move to remove the cap,” Kiambu Town MP Jude Njomo, the architect of the rate capping law, said when contacted.

“Treasury should concentrate on efforts that will make credit available to the public.”

He has vowed to marshal his colleagues to reject any amendments to the Act.

The Consumer Federation of Kenya (Cofek) said the proposed pricing model amounts to giving banks the leeway to set own high rates.

“The interest rate caps were meant to significantly reduce the discretion for banks to over-charge consumers. Allowing banks to assess the purported risks to borrowers, without verification of an independent third party is same as scrapping the capping,” Cofek secretary-general Stephen Mutoro said.

“What we have been consistently saying is that the capping was meant, in the short-term, to address abuse of discretion. Let banks decide whether or not to lend. But once the decision is made, we demand flat rates,” added Mr Mutoro.

Mr Gaichuhie, however, said Treasury is mulling providing a ceiling for the risk component.

ALSO READ: Pension funds stand to gain from rate cap review