The Central Bank of Kenya (CBK) has begun on-site inspections of commercial banks to ensure they comply with the Risk-Based Pricing Model (RBP) and that borrowers benefit from lower interest rates.
Banks which fail to lower rates for the benefit of borrowers, will face penalties of up to three folds their profit – the CBK Governor Kamau Thugge said.
Governor Thugge confirmed that five banks are currently under review, with the findings expected in two weeks.
“If we just follow the risk-based credit pricing model, there is no reason why the lending rates to the private sector should not come down. There is a provision now, to charge the banks by penalties that are three times the amount the individual banks have benefited by,” Thuge said.
Risk-Based Pricing (RBP) allows lenders to assess a borrower’s credit risk based on their past borrowing behavior. Under this system, individuals with higher credit risk may face higher interest rates, while those with strong credit histories will enjoy lower borrowing costs.
CBK’s actions align with recent amendments to the Banking Act, which mandate penalties for banks that fail to pass on the benefits of reduced funding costs to borrowers.
“The MPC will closely monitor the impact of these policy measures alongside developments in the global and domestic economy and stands ready to take further action as necessary in line with its mandate,” read a statement from CBK.
Since 2022, CBK has advocated for the adoption of the Risk-Based Pricing framework across the banking sector.
Also Read: What it Means as Kenyan Banks Adopt Risk Based Pricing Model
RBP enables lenders to use credit profile characteristics to set interest rates that vary by credit quality. As a result, not all borrowers will receive the same interest rate or credit terms for a particular loan product.
High-risk borrowers, perceived as less likely to repay their loans on time, will be charged higher interest rates. In contrast, low-risk borrowers, who demonstrate greater financial stability, will be eligible for lower interest rates.
However, Kenyans with credit scores below the minimum threshold required by financial institutions may face significantly higher borrowing costs compared to those with above-average credit scores.
CBK’s enforcement of the RBCPM aims to create a more equitable and transparent lending environment, encouraging responsible borrowing and lending practices within the financial sector.
Metropol Credit Score
Metropol, a leading Credit Reference Bureau (CRB) in Kenya with a presence in both Kenya and Uganda, offers a Metro Score that ranges from 200 to 900.
Higher scores indicate better creditworthiness, while lower scores may suggest challenges in debt repayment. For example, a score of 200, which is considered poor, indicates a history of late or missed payments.
Metropol CRB provides user-friendly options for Kenyans to access their credit information, including their Credit Score and full credit profile. Using a USSD code *433#, individuals can request their Credit Report or download the Crystobol app from the Google Play Store.
Additionally, over 300 CRB Mtaani agents offer services to help individuals access their credit profiles. Borrowers are advised to prioritize timely repayment of installments and borrow only what they can afford to repay.
