Equity Group has set its average lending rate on commercial bank loans at 15.75 per cent after getting the nod to roll out risk based pricing from the Central Bank of Kenya (CBK).
The new average interest rate by the bank is an all inclusive pricing on loans by the Equity and incorporates other fees including negotiation fees, loan appraisal fees and other loan facility charges.
The new pricing regime is expected to track the rate of return on government borrowing through Treasury bills and bonds in addition to operating costs and credit risks by customers.
“We agreed on an opportunity cost approach by looking at where the market prices are in terms of risk-free lending,” said Mary Nteere, Equity Group Associate Director for Strategy.
Interest rates on all loans are expected to range between 13 and 18.5 per cent with loans being classified in different parameters including by sector, product and customer risk.
Loans under the same classification are not expected to have a more than 200 basis points difference.
At the same time, the average lending rate is also expected to track the Central Bank Rate (CBR) which is a pre-determinant of the risk-based pricing rate.
According to Equity Group Managing Director James Mwangi, the new pricing regime is expected to create transparency in the pricing of the lender’s loans to customers.
“The one year Treasury bill will pair with the one year loan. The yield curve in Kenya is up to 30 years enabling us to match our interest rates to the sovereign risk yield curve,” he said.
“Borrowing has been complex because of a myriad of charges. We want the customer to look at one effective rate which is comparable from one bank to another.”
Interest rates on commercial bank lending had been capped at no more than four per cent of the CBR in more than three years between September 2016 and November 2019.
Despite the waiver of the caps, average interest rates have tracked at just one per cent above the previous range of CBR+4%.
This is as the CBK takes time in reviewing and giving the go-ahead for commercial banks to implement risk-based pricing models.
For instance, average interest rates on commercial bank lending closed last year at 12.16 per cent, just 5.16 percentage points above the CBR in spite of pressure on the sovereign yield curve.
Commercial banks had been reluctant to lift interest rates following the end of the interest capping regime in fear of backlash from not just the CBK but also customers.