Central Bank of Kenya is now allowing lenders to increase cost of loans for some borrowers – Business Insider Africa

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Kenyan banks have begun getting approvals from the Central Bank of Kenya to increase cost of loans for high-risk borrowers such as petty traders and informal sector workers.
Already, one of the country’s biggest lenders, Equity Bank, said the high risk element in its lending formula has received approval from the Central Bank of Kenya (CBK). This would see the lender’s loans get priced to an upwards of 18.5%.
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“Interest on loans will now be based on the risk of the client. We are using sovereign risk as the base, then adding the risk of the individual sector and then within the sector the specific client risk and then we add operational costs.
“So instead of the previous [pricing model] where we had loan appraisal fees, and all the rest, we are now saying here is one rate of interest and it is annualised and on reducing balances. We have simplified and removed the fees and combined the rate into one based on the sovereign risk,” Equity Bank’s CEO James Mwangi was quoted to have said.
Mr Mwangi went further to explain that small businesses will henceforth get loans of between 14% and 16%, while unsecured loans will attract 18% interest.
“There are corporates like the blue chip firms which will be able to get as low as the sovereign rates, those with higher risk will go all the way to 16 percent, then there is the SMEs from 14 percent to 16 percent. The unsecured individual lending micro, small and medium enterprises from 16 percent to 18 percent,” he said.
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The CBK’s approvals are coming after many lenders in the East African country petitioned the IMF to intervene over the apex bank’s reluctance to approve their request to increase cost of loans.
According to Business Daily, the CBK’s delayed response to the issue of risk-based lending had forced many banks to cut back on lending even to high quality customers. Instead, they resorted to investments in government securities.
Note that a borrower is considered “high risk” when a lender considers them most likely to default on a loan.
Cost of loan, on the other hand, has to do with all the costs, interests and other charges associated with borrowing.
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