NAIROBI, Kenya August 2 — The Kenya Bankers Association has called on the Central Bank of Kenya to fast track the shift of banks to risk-based loan pricing to revamp private sector credit growth and support the effective transmission of monetary policy directives.
The banking lobby group noted that the slow approvals and implementation of risk-based pricing frameworks by banks continue to constrain lending by the industry as banks are not adequately able to effectively accommodate risk in credit pricing.
The State of the Banking Industry (SBI) Report 2022 noted that a stronger shift in the pricing frameworks by banks will allow effective pricing of risk.
Kenya has been working on a risk-based loan pricing model since repealing the interest capping law in 2019.
Under risk-based pricing, lenders offer different consumers different interest rates or other loan terms based on the estimated risk for each borrower.
Even so, the move to the model has been curtailed by slow transition with only six banks having approvals of their lending models as of the end of 2021, accounting for 20.0 percent of the industry’s private sector loan portfolio.
The slow transition has seen elevated credit risk in the sector which has continued to hamper private sector credit growth.
“Private sector credit growth in 2021 remained in the positive territory but continued to be trapped in single digit notwithstanding the CBK’s accommodative monetary policy stance adopted through the period,” the report noted.
The increased credit risk has also seen non-performing loans increase as the economy continued to suffer the devastating effects of the pandemic and the measures applied by individual banks to mitigate any further deterioration of their credit portfolios.
The stock of non-performing loans (NPL) edged upwards in 2021, to approximately Sh460 billion from Sh436 billion in 2020.
“The state and evolution of the NPLs reveals the extent to which market uncertainty has filtered into the risk attitude of banks, and consequently the adjustments they are making regarding loan portfolio growth, adherence to regulatory requirements as well as shareholder expectations,” the report noted
Further, with an elevated credit risk banks made more provisions for expected credit losses sufficient to offset this risk, the report notes.
Banking sector loan loss provisions contracted sizably in 2021 compared to 2020 but remained higher than the pre-pandemic levels.
In 2021, the loan loss provisions stood at Sh58.97 billion compared to Sh110.30 billion in 2020 representing a 46.5 percent contraction on an annual basis, mainly driven by tier 1 banks, as provisions among tier 2 and 3 banks changed modestly.
These provisions covered 2.0 percent of net loans and advances and absorbed 12.9 percent of NPLs in 2021 compared to 3.8 percent and 25.7 percent in 2020, respectively.
