Equity Rates up on New Loan Pricing Model

Risk-based pricing of Equity Bank’s credit facilities has started to be implemented, and riskier customers will now pay up to 21.02 percent for loans.

The largest retail bank in the nation now has a base rate of 12.5 percent plus a maximum margin of 8.5 percent, according to a notification delivered to some of the lender’s clients.

Accordingly, borrowers can anticipate that the interest rate on their loans will range from 12.5% to 21.02%, depending on their creditworthiness.

Loan rates for borrowers with less steady incomes or those who are thought to be at danger of default will be set at the high end of the risk-pricing spectrum.

“Equity Bank (K) LTD received approval from the CBK (Central Bank of Kenya) to implement risk-based pricing when lending to customers,” said the Nairobi Securities Exchange-listed firm in the notice.

“The new pricing model applies a reference rate (in this case Equity Bank Reference Rate, currently at 12.52 percent) plus a margin (currently a maximum of 8.5 percent) per annum.”

One client, for instance, had his current credit facilities re-priced from 13 percent to 18 percent, highlighting the artificially low rates that had lingered following the abolition of interest rate regulations on November 7, 2019, when the regulator slowed banks’ return to free market operations.

James Mwangi, CEO of Equity Group, stated in a November 2022 interview with the Business Daily that the bank had been protecting its clients from the effects of COVID-19 by making loans at a rate of 13.5%.

According to Mr. Mwangi, the risk-based pricing model had to be activated due to the economic recovery from the epidemic and the rising global interest rates brought on by inflation.

When lenders give different borrowers different interest rates or other loan terms depending on the anticipated risk that those borrowers would default on their loans, this is known as risk-based pricing.

The likelihood of a customer defaulting, as well as the exposure to that risk and loss in the event of default, will be taken into account by banks employing risk-based models to price their loans.

The widespread use of risk-based lending will increase credit costs for the majority of borrowers, but it is anticipated to encourage banks to provide more credit because the higher returns will offset the risk that some customers would default on their loans.

The growing inflation and current elevated credit risk, according to the Kenya Bankers Association, suggest that loan expansion may be restrained until a deeper market-wide transition to a risk-based environment is accomplished.

More than half of the industry’s 39 lenders had submitted formulas for pricing risks as of last November, and as a result, the return of a model where interest rates vary depending on the chance of a borrower failing on repayment was put into motion.

The most recent development, risk-based lending, is anticipated to increase bank profitability even more while supporting the institutions’ decision to once again charge for bank-to-mobile transactions.