Kenya: Equity Bank set to raise interest rates for riskier borrowers from January

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Equity Group plans to fully start pricing loans based on the risk profile of borrowers from January, citing recovery from pandemic shocks which had hit earnings for businesses and families amid runaway inflation.

The lender will be implementing risk-based lending nearly a year after getting greenlight from the Central Bank of Kenya in March to price credit at an interest rate of up to 18.5 per annum.

The CBK has since approved formulas for pricing of risks from more than half of the industry’s 39 lenders, setting in motion the return of a model where interest rates vary based on the likelihood of a borrower defaulting on repayment.

Equity, like its peers, is however yet to fully price loans based on risk profile, largely locking out borrowers with high chances of defaulting especially those without security or steady income streams.

“So far we have maintained our interest to a maximum of 13.5 per cent simply because we wanted to help customers recover fully [from the pandemic]. As this environment changes —and interest rates have gone up significantly globally because of inflation — we will now activate risk-based pricing,” Equity Group chief executive James Mwangi told reporters in Nairobi.

“We are working very hard to activate that and we hope by January, we will have fully implemented the risk-based pricing.”

A number of top-tier banks have adopted a gradual rollout of the internationally-applied loan pricing model to avoid shocking the credit market which is recovering from the aftermaths of Covid-19 battering and interest rate controls which ended November 9, 2019.

Widespread adoption of risk-based lending will raise the cost of credit for most borrowers but is expected to incentivise banks to lend more as the increased returns will cover the risk of default by some customers.

“The objective of risk-based pricing is to be as inclusive as possible [by giving] everybody a chance to borrow based on their risk and create an environment of rewarding people with financial discipline,” Mr Mwangi said.

“So we will reduce the risk premium for those who are good payers and for those who may not have a good track record, we don’t exclude, but price their risk.

For the unsecured ones, we will not exclude them because they don’t have security, but price the risk of lack of security.”

Equity’s net profit for nine months through September climbed 26.61 per cent to Sh33.35 billion after interest earnings rose 23.43 per cent to Sh59.84 billion, while non-funded income went up 32.06 per cent to Sh42.22 billion.

Loan books expanded 20.55 per cent to Sh673.91 billion, while holdings in government securities were flat, growing 1.43 per cent to Sh366.45 billion.

The bank said it will, going forward, reallocate investments in government debt to lending to businesses and families which promises higher returns amid the move to risk-based pricing of loans.

“Continuous pursuit of efficiency gains and our business transformation strategy has repositioned the business for value creation and strategic growth,” Dr Mwangi said in a statement.

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