CBK MUST ALLOW BANKS TO ADOPT RISK BASED LENDING.

Many of you will remember how we fought the interest rate capping law till it was scrapped. The reason we opposed this law is because it provided a single lending rate yet we know borrowers have different risk profiles.

Prescribing same rate of lending for Safaricom and Mama Mboga obviously doesn't make sense. As a result, banks concentrated on lending to government and low risk clients who fell within the prescribed lending rate. Growth of credit to private sector slackened and the economy weakened as a result. This was just as we had foreseen.

We urged the government to scrap the interest rate capping law or amend it to create multiple interest rate setting corridors that would provide for a wide array of borrowers.

You maybe wondering why the scrapping of the interest rate capping law has had little impact on the economy.

Since the interest rate capping was scrapped, CBK has refused to allow banks to adopt risk based lending. Banks are still stuck with the rate which was there during the capping era. So in essence, nothing has changed.

What CBK should do is accept lending models from banks that do not allow interest rates to rise above 20% for any class of borrowers. If a borrower is priced above 20% then it is safer not to lend to such till their risk reduces.

This will give banks space to play with. Credit will start flowing to the private sector hence allowing for quality economic growth. At the same time it will put a stop to predatory lending.

The economy is hurting badly due to reduced access to credit by the private sector. CBK should stop the obsession with low lending rates to allow government access cheap loans. This is encouraging more borrowing by the government and is making the economic situation worse.

Author: Ephraim Njega (MBA, BCom, (UoN) Dip(I) MIS(KIM))

Posted in 26th August, 2021 on personal Facebook Profile.