Banks accuse CBK of controlling loan rates

Central Bank of Kenya governor Patrick Njoroge. PHOTO | DIANA NGILA | NMG

By PATRICK ALUSHULA
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Summary

• Multiple bank executives told Business Daily that the CBK has gone silent and failed to approve their submissions, forcing them to continue operating as if they are still under lending rate controls to avoid falling in trouble with the regulator.
• Banks say that the delayed shift to risk-based lending has forced many of them to deepen investment in government securities and restrict lending to high quality customers with lower risk of default.
• To play it safe, banks have cut the average lending rates in line with reduction of the Central Bank Rate (CBR) which has been lowered to seven percent, underlining the conundrum lenders find themselves in.

Commercial banks are accusing the Central Bank of Kenya (CBK) of capping lending rates after blocking their bid to raise the cost of loans despite Kenya having scrapped legal controls of credit charges on November 7, 2019.

The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.

Multiple bank executives told Business Daily that the CBK has gone silent and failed to approve their submissions, forcing them to continue operating as if they are still under lending rate controls to avoid falling in trouble with the regulator.

“Banks were asked to submit their risk-based loan pricing formulas but none has been approved by the CBK to date. Some applications were made as early as January,” a CEO of a top bank told Business Daily while seeking anonymity for fear of CBK reprisals.

“This is CBK’s way of controlling interest rates because risk-based lending means raising rates for riskier borrowers.”

Banks say that the delayed shift to risk-based lending has forced many of them to deepen investment in government securities and restrict lending to high quality customers with lower risk of default.

Top lenders — KCB, Equity , Co-operative , Stanbic , DTB , NCBA , Absa and Standard Chartered

— raised their investment in government debt securities by 46 percent to Sh1.14 trillion in the nine months ended last September.

This emerged in a period when supply of loans to the private sector grew by 7.3 percent in the years to September, the slowest since Kenya announced its first case of Covid-19 in March 12 and below the ideal rate of 12-15 percent needed to support economic growth.

To play it safe, banks have cut the average lending rates in line with reduction of the Central Bank Rate (CBR) which has been lowered to seven percent, underlining the conundrum lenders find themselves in.

The regulatory gridlock and a lower CBR is partly the reason average lending rates dropped to 11.75 percent in September – a record low that was last witnessed in the early 1980s.

This is the lowest average lending rate since the CBK started disclosing the rate in July 1991 during the reign of the then Moi-era governor Eric Kotut and matches annual borrowing costs disclosed by the World Bank in 1980.

The lending rates averaged 12.38 percent in November last year when rate cap was repealed with the CBR then at 8.5 percent. Banks have been eager to price loans to different clients based on their risk profile but this flexibility remains a mirage after the CBK stepped in as the de facto controller of cost of credit. The government removed the cap last November after it was blamed for curbing credit growth during 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 they should charge a particular customer.

The cap, which set rates at four percentage points above the central bank’s benchmark lending for all customers, had taken out that equation and the flexibility that lenders say they need to accommodate customers deemed as risky borrowers.

The inability to price risk in lending is shutting out many prospective borrowers as banks seek to reduce their exposure from already large defaults brought by the Covid-19 pandemic.

Equity Group CEO James Mwangi says the bank has presented the model twice to the CBK for a discussion.

“We decided that with or without the approval, we will not change the pricing. The highest interest rate at the moment is 13 percent,” said Mr Mwangi.

“We have presented the model twice and I believe we are amenable -- it was more of a discussion given that the interest rates are not regulated now.”

The Banking (Increase of rate of banking and other charges) regulations of 2006 require banks to seek CBK nod when changing features of any product, such as loans.

“Any change in the features of the product changes the product as earlier approved and, therefore, the changed product with less, more or otherwise varied features must be approved by the CBK prior to rollout,” the CBK had reminded banks in a 2016 circular.

The CBK, which last year warned banks against reverting to punitive interest rates of more than 20 percent in post-rate cap regime, wants every lender to justify the margins they put in their formulas.

KCB chief executive Joshua Oigara told the Business Daily that there are still “a lot of discussions” with the regulator on the loan pricing formula and hopes for a conclusion next year. “We have had several discussions with them (CBK) and it is a challenge. We are still in that debate where we are discussing because it is a new model,” said Mr Oigara.

Mr Oigara explained that part of the discussions involves an explanation on factors that determine the pricing of loans.