NAIROBI, Kenya, Mar 27 – Digital lender, Jijenge Credit limited has backed calls for a common base lending rate being spearheaded by commercial banks, saying the move will offer predictability and flexibility to borrowers and lenders alike.
“It is imperative to construct a scientific and objective loan pricing model so as to keep pace with the competition rhythm of commercial banks in other mature countries and make the allocation of financial resources in the country more optimized and better serve the needs of borrowers while also protecting our financial market,” said the firm’s CEO Peter Macharia on the sidelines of the announcement made Tuesday.
Adding that, “Banks use the base rate as a benchmark, adding a margin or what we simply call spread to it to arrive at the final interest rate they offer to borrowers.”
Commercial banks are in talks with Central Bank of Kenya (CBK) for an overhaul of their loan pricing models to come up with a common base lending rate amid concerns that they are not cutting interest rates in line with reducing central bank rate (CBR).
The current risk-based pricing model, according to lenders, is not adaptable enough to market changes since it presents different price points that create inconsistencies, something Macharia, a banker himself agrees with.
Further adding that, one of the challenges Kenya’s economy is presently faced with, is the high cost of loans, which Macharia says, has made many businesses unsustainable.
“It explains why we are currently grappling with a high number of buildings and vehicles being auctioned on account of borrowers being unable to meet their obligations to lenders.”
The Central Bank of Kenya (CBK) has been working on a new loan pricing model for loans and is considering submitting it to public participation, with the CBK Governor Kamau Thugge saying Tuesday that a proposal to that effect will be ready in a fortnight.
“I hope within the next two weeks we’ll come up with a proposal. We are looking at international best practices and how to amend them to fit our situation,” Dr. Thugge said while appearing before a parliamentary committee.
Banks have been lobbying for an overhaul of the existing risk based pricing system, advocating instead for a common reference rate – arguing that the risk-based pricing model is not sensitive enough to market changes, presenting different price points that create complexity and inconsistencies across the industry.
Ideally, a base rate is the foundation upon which banks calculate the interest rates they charge for loans, mortgages, and other credit products.
When the base rate increases, banks typically raise the interest rates on their loans, making borrowing more expensive. Conversely, a decrease in the base rate can lead to lower interest rates on loans.
This comes even after several commercial banks announced reductions in lending rates after CBK’s twin move to cut both the benchmark Central Bank Rate (CBR) to 10.75 percent and the Cash Reserve Ratio (CRR) to 3.25 percent.
The apex bank has cut a total of 225 basis points cut in the Central Bank Rate since August last year when it began its easing cycle from a high of 13 percent.
In February, the CBK directed that lenders lower their rates in line with the new monetary policy stance threatening penalization and on-site inspections.
