Equity Bank Now Closer to Risk-Based Lending


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Equity Bank Now Closer to Risk-Based Lending


James Mwangi, Equity Group MD, Mary Nteere, Head of Financial and Regulatory Reporting and Sam Gitwekere, Group Director of Credit Risk, at the half-year results announcement on August 17, 2021. PHOTO | DIANA NGILA | NMG

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Summary

  • The lender’s chief executive, James Mwangi, said on Tuesday that talks with CBK were close to being concluded and that the move to risk-based lending would allow it to accommodate riskier clients.
  • Equity said it is now working on how to make sure the model is able to assess the risk of each client and give them a “fair” rate.
  • Credit growth to the private sector has remained below 10 percent, which Mwangi says cannot support the target economic growth rate of seven percent this year.

Equity Group #ticker: EQTY is set to switch to client risk profile based loan pricing following discussions with the Central Bank of Kenya (CBK).

The lender’s chief executive, James Mwangi, said on Tuesday that talks with CBK were close to being concluded and that the move to risk-based lending would allow it to accommodate riskier clients.

“We have been in negotiations with the CBK and we are at the end of the negotiations,” Mwangi said.

“We also want no one to be left behind in terms of access to credit and the ability to assess each risk is a prerequisite. We appear to have a common understanding with CBK and hope to complete these deliberations soon. “

Equity said it is now working on how to make sure the model is able to assess the risk of each client and give them a “fair” rate.

Credit growth to the private sector has remained below 10 percent, which Mwangi says cannot support the target economic growth rate of seven percent this year.

Banks typically 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.

Kenya removed legal controls on credit charges on November 7, 2019, prompting the CBK to ask lenders to submit new loan pricing formulas that would serve as the basis for setting interest rates.

The CBK said last month it had evaluated lender models and approved several while firing others to revise theirs.

“We’ve had these conversations with them and we’ve grown with a lot of these banks. Some had not done their job well, so we asked them to revise, ”said Patrick Njoroge, Governor of the CBK.

Part of the discussion involves an explanation of the factors that determine loan pricing such as cost of funds, return on assets, operating costs, and the risk premium for non-performing loans.

The CBK, which warned banks in 2019 against returning to punitive interest rates of more than 20% under the rate cap regime, wants every lender to justify the margins it puts in its formulas.


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