Kenyan Banks Report CBK to IMF Over Lending Rates

Kenyan banks executives have protested to the International Monetary Fund (IMF) over the Central Bank of Kenya’s (CBK) reluctance to approve lenders’ applications.

This is to raise the cost of loans following the scrapping of lending rate controls on November 7, 2019.

The IMF has revealed the lenders’ protests amid the accusation of the banking regulator capping lending rates after blocking their bid to raise the cost of loans.

CBK Regulations

The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates on new credit.

Bank executives reckon that the CBK has gone silent on some of the applications and failed to approve their submissions, forcing them to continue operating as if they were still under lending rate controls to avoid falling in trouble with the regulator.

“Banks consider that approvals could be expedited,” said the IMF in reference to CBK’s delay to approve the higher lending rates.

“Banks’ credit pricing models require approval by the CBK, and banks must justify charging higher rates to customers presenting higher credit risks,” added the fund.

Banks say that the delayed shift to risk-based lending has forced many of them .

This is to deepen investment in government securities and restrict lending to high-quality customers with a lower risk of default.

This emerged at a time supply of loans to the private sector grew by 7.8 percent in the year to October, which is below the ideal rate of 12-15 percent needed to support economic growth.

The lending rates averaged 12.38 percent in November 2019 when the rate cap was repealed with the Central Bank Rate (CBR) than at 8.5 percent.

October Lending Rates

In October, lending rates averaged 12.12 percent.

To play it safe, banks have slightly cut the average lending rates in line with the reduction of the CBR, which has been lowered to seven percent, underlining the conundrum lenders find themselves in.

Banks have been eager to price loans to different clients based on their risk profile but this flexibility remains a mirage after the CBK stepped in as the de facto controller of the cost of credit.

The government removed the cap after it was blamed for curbing credit growth during its three years of existence.

Banks use a base rate that is normally the cost of funds, plus a margin and a risk premium, to determine how much they should charge a particular customer.