The Central Bank of Kenya (CBK) has revealed plans to move away from the Risk-Based Credit Pricing Model (RBCPM), five years after it was introduced.
In a statement released on Wednesday, April 23, the CBK said it was time to assess the model to see whether it still met the needs of the evolving banking sector landscape, five years on.
The RBCPM was a joint initiative between the CBK and the banking sector, first introduced in 2019 as part of a broader strategy to address pertinent issues, including high lending rates and skewed loan pricing methods.
Over the past five years, the model has been integral in the banking sector, serving as a market-based framework to guide how banks price credit risk for their clients seeking loans.
Central to the proposed changes by the CBK is the adoption of the Central Bank Rate (CBR) as the standard benchmark for determining lending rates. Under this new model, banks will determine lending rates by adding a specific premium to the CBR. This premium is referred to as "K".
Further, CBK revealed the proposed changes to the Risk-Based Credit Pricing Model (RBCPM) was a way to boost transparency and fairness in the credit market.
Still on the question of transparency, CBK has committed to publishing the components of each bank's “K” value, and the information will be available online.
"CBK will publish the components of each bank's lending rate premium (“K”) on its website, the Total Cost of Credit (TCC) website, and in two newspapers of nationwide circulation," the monetary authority said.
Dig deeper: The RBCPM framework was adopted primarily to assess the likelihood of a borrower to repay a loan so that banks can price the credit accordingly, instead of having one uniform interest rate. However, over the years, reviews have shown several shortcomings in the framework, including the fact that many banks failed to adopt the framework.
In addition, it was observed that some banks relied on pricing mechanisms that resulted in excessively high model-generated interest rates. CBK also observed that some banks introduced charges outside the RBCPM structure, raising the question of transparency.
Thirdly, it was also observed that many banks used the average cost of deposits over six to twelve months to determine the cost of funds. This practice was detrimental as it meant that loan pricing did not quickly reflect reductions in the CBR.
A consultative paper has since been released by the monetary authority, inviting the public and stakeholders to give feedback on the proposed changes.
