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The Central Bank of Kenya (CBK) has abolished selective borrowing conditions for bank staff. In the same vein, the apex bank in Kenya rejects calls to exempt insider loans from its new risk-based loan pricing framework. TechPolyp suggests that this decision will raise borrowing costs for thousands of employees who previously enjoyed cheaper credit compared to ordinary customers.
In a recent turn of events, the regulator confirmed that only loans with fixed rates and those loans denominated in foreign currency will remain exempt from the new formula. Furthermore, the CBK has scheduled implementation to be fully operational by March 2026. This will give lenders time to align systems. In addition, all variable loans will be tied to the Kenya Shilling Overnight Interbank Average (KESONIA).
CBK also confirmed via its August 26 circular that banks will add premiums covering borrower risk and shareholder returns. Similarly, they will add operational expenses and processing charges in achieving the risk-based loan pricing.
For decades, Kenyan banks granted heavily discounted loans to staff and directors. These included personal, car, and mortgage facilities. It’s noteworthy that these insider benefits are incentives to recruit and retain skilled professionals in a highly competitive financial sector. Moreover, the low-interest loans were loyalty tools and significant benefits for employees.
Risk-Based Loan Pricing: CBK Defies Industry Push for Exemptions
The central bank’s decision followed months of consultations with banks, manufacturers, and the International Monetary Fund (IMF). The CBK also consulted other stakeholders. Several groups pushed for broad exemptions, interestingly. These include staff loans, Islamic products, digital facilities, institutional lending, and syndicated deals. Their contention was on complicated contractual arrangements. However, CBK refused, insisting on a level playing field across the sector.
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In furtherance, this development shows one of the most sweeping changes to Kenya’s credit pricing framework. This is particularly significant since the 2019 repeal of interest rate caps. By reason of the rejection of exemptions, CBK signalled its intent to strengthen transparency and reduce distortions. In addition, it also aims to enforce fairness in lending practices regarding the risk-based loan pricing.
The changes compel lenders to decide between offering new facilities as fixed-rate or variable loans. Commercial banks must start applying the KESONIA rate to all new facilities beginning September 1.
Additionally, institutions have up to six months to achieve full compliance. Existing loans must migrate to the new formula within that period. It’s however worthy of note that boards must approve risk premiums and secure the apex bank’s authorization.
The overhaul reshapes Kenya’s lending scheme by removing preferential treatment. This development further entrenched risk-based loan pricing for every borrower class. Industry insiders fear the end of discounted staff loans will erode a key recruitment advantage. Borrowers, meanwhile, brace for higher costs, with banks expected to pass additional premiums directly onto loan holders.
