Chairperson of the Presidential Council of Economic Advisors David Ndii has raised questions over the loan pricing in the country affecting the economy.
Ndii's concerns come days after the Central Bank of Kenya (CBK) cut the lending rate basis point by 50 points amid the push and pull to provide cheaper loans to Kenyans.
According to Ndii, most of Kenya's banks use risk-based lending, and while bankers argue this approach helps banks set loan rates based on individual risk profiles, improving pricing accuracy and diversifying financial products, Kenya's informal economy makes risk pricing difficult.
In risk-based lending, borrowers who are considered riskier, like those with poor loan histories or unstable income, are charged higher interest rates, while those with better creditworthiness receive lower rates.
Ndii advised that for Kenya to resolve the important aspects of the economy, the country has to streamline the credit market.
Speaking at the Metropol risk-based pricing forum breakfast, the senior economic advisor revealed that until the credit market is resolved, then the Kenyan economy will continue to suffer.
"We recognize that for us to be able to address the economic objective, we have to deal with the questions of these pervasive failures in the credit market because they affect the important sectors of the economy," Ndii explained.
According to Ndii, if the loan pricing is not resolved, the country cannot make important strides that will improve the economy.
"You cannot create jobs, you cannot raise productivity, which are important economic factors, unless you address the credit architecture," Ndii continued.
The economic advisor went on to explain the government's approach to increasing the creditworthiness of Kenyans to improve the credit market and include more Kenyans in the informal sector and small and medium enterprises (SMEs).
The rate cut by the CBK followed a Monetary Policy Committee (MPC) meeting on Wednesday, February 5.
The MPC decided to lower the rate as inflation was expected to remain below the 5 per cent midpoint of the Central Bank’s target range in the near term.
