Will risk based pricing bring cheaper loans in Kenya

Written by Oral East Africa

Kenyan borrowers can hope for lower loan costs as banks adopt new pricing models that will assess the risk of each individual and assign specific interest rates.

Absa Bank became the latest to announce it has adjusted borrowing rates from 16.5 percent to 13.5 percent while shifting to a risk-based model that will give customized interest rates according to their risks.

The bank said it would get rid of negotiation fees under the new model which will mean cheaper costs for the borrower.

“Absa has fully implemented the risk-based pricing model which eliminates negotiation fees as part of pricing, in this model the final interest rates on a loan facility is customer specific comprising of a base rate plus a margin determined by the customer’s individual risk profile,” Absa Bank said.

Rate cap

The cost of credit has been a thorny issue in the country with banks accused of being too quick to adjust rates upwards and too slow to bring them down when market conditions like the Central Bank Rate (CBR) and the cost of money decline.

This formed a rallying call for members of parliament to cap interest rates in 2016 at 4 basis points above CBR. This however worked against access as banks denied borrowers money opting to lend to the government instead.

The rates were finally removed in 2019 but banks were required to develop loan pricing formulas to be approved by CBK. The new models include factors that go into the pricing model, like cost of funds, risk premium because of non-performing loans or return on assets, and an element of operating costs.

Borrowers are now hoping that the new model and lower benchmark rates will unlock credit to the private sector to kick-start the economy after Kenya witnessed a slowdown in 2024.

Lenders are under pressure to demonstrate they have cut down loan costs after rates dramatically rose in 2024 and then came down towards the end of the year as inflation cooled.

CBK Governor Dr Kamau Thugge has been urging banks to bring down cost of loans as the regulator lowered CBR from 12 percent to 10.75 percent over the last few months to kick start the economy after private sector lending was crushed.

Absa joins other banks including KCB and Cooperative Bank who have made public announcements of interest rate cuts after the regulator asked banks to respond to Central Bank Rate (CBR) cuts.

Absa however said there is the third cut in just three months following the move by the Central Bank of Kenya to bring down benchmark rates, indicating they have been responsive to their customers. plans for further branch expansion and strategic relocations to ensure the delivery of seamless, accessible, and customer-centric products in emerging markets, and rural and urban areas.