Your credit rating will soon determine the interest paid on a loan

Friday September 29 2017

The CRB has been faulted for retaining loan

The CRB has been faulted for retaining loan defaulters in their data base for as long as five years even after they finalise their payments, curtailing them from accessing fresh credit. FOTOSEARCH 

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The Central Bank of Kenya is banking on risk-based lending as a measure to control the cost of loans once the interest rate cap is lifted.

A day after CBK’s Monetary Policy Committee meeting a week ago, Governor Patrick Njoroge told a press briefing that once the interest cap law is amended, the credit behaviour of an individual — based on their score from the Credit Reference Bureau — will be used to determine what interest rate they will be charged on a loan.

Kenya has given a strong indication that it is reviewing the year-old interest cap law, with the Central Bank saying it has been “problematic in many ways.”

The Treasury plans on having a forum to discuss whether the law should be altered once a report on its impact is ready.

According to Dr Njoroge, CBK would do away with “the status quo” in which banks would lend to particular investors before the interest cap was in place.

“Consideration will be put on a customer’s credit history; the CRB will not just be a blacklisting firm, where those who fail to pay their loans are slapped with a red card,” said Dr Njoroge.

“If you pay your loans on time, that has to work for your credit score to get a better rating, compared with a person who has never borrowed and therefore never been tested [on repayment].”

Retaining loan defaulters

The CRB has been faulted for retaining loan defaulters in their data base for as long as five years even after they finalise their payments, curtailing them from accessing fresh credit.

There are plans to harmonise the period bad borrowers are retained in the database across the borders especially with the East African region moving towards cross-border credit information sharing.

At the meeting, Kenya’s MPC maintained the benchmark rate at 10 per cent. This means borrowers will continue paying a maximum interest rate of 14 per cent on their loans, in line with the state-backed controls that cap the rate at four percentage points above the policy rate.

The CBK also plans on arming consumers with enough information on costing of loans to help them make prudent decisions.

“You can look at a website and have information on all lending rates banks are offering, and window shop for loans from different banks,” he said.

During the runaway interest rates regime, banks were accused of having many hidden costs on top of exploitative interest rates.

“What we want is a more disciplined credit market, what you saw in the pre-rate cap regime was a level of high indiscipline by banks; we will not slip back to the ‘status quo’,” said Dr Njoroge.

Before the law on capping, loans attracted interest rates of up to 18 per cent and beyond, leaving borrowers with a significant spread to cover their cost of business and retain some margin.

Lower profitability

Last year’s capping of interest rates shaved Ksh26.3 billion ($255.6 million) off commercial banks’ lending income in the first six months of the year, setting the lenders up for lower profitability this year.

Analyst James Mose from Britam asset managers however said changes in the law are unlikely to lead to increased loans for tier three banks since most customers had moved to Tier I following the collapse of Chase Bank and Imperial Bank — which were ranked under Tier II.

“Customer confidence in tier three lenders waned after the Chase Bank and Imperial Bank case,” said Mr Mose, the acting chief investment officer.

Tier I banks have assets above Ksh25 billion ($242 million) and include KCB, Standard Chartered and Equity Bank. Tier II lenders own assets between Ksh6 billion ($58 million) and 24.9 billion ($241 million), and include Bank of Africa while Tier III banks have assets below $58 million. They include Giro Bank, Guardian and Dubai Bank.

Over the past two years five Tier III banks — Equatorial Bank, Giro Bank, Oriental Bank, Fidelity Bank and Habib Bank have all been acquired.

Cytonn Investments has predicted that the financial services sector is poised for a wave of consolidations, mergers and acquisitions driven by stiffer regulation and the need by players to remain competitive given recent changes in the regulatory environment.