Credit Score

What it Means as Kenyan Banks Adopt Risk Based Pricing Model

Commercial banks in Kenya have received approval to advance in Risk-Based Pricing, in what is seen as a measure to tame the ballooning Non-Performing Loans portfolio.

The move aligns with the ongoing transition of banks, microfancnce institutions and mobile lenders to a regulatory framework of pricing facilities based on a borrower’s credit history.

According to Dr. Samuel Tiriongo – Director of Research and Policy at Kenya Bankers Association (KBA) – the future of credit market in Kenya is well entrenched within the Risk Based Pricing, to imply borrowers will be assessed on their basis of their risks.

“We believe the future of credit market in Kenya is well entrenched within Risk Based Pricing and therefore we foresee a situation where lending practices are going to embed the true principles of lending which means that for all borrowers will have to be assessed on their basis of their risks and therefore given prices that mark their risk profiles,” said Dr. Samuel Tiriongo.

What is Risk Based Pricing?

Risk Based Pricing simply implies a borrower with high credit risk being assessed based on the previous borrowing behaviour and is likely to be charged with a high interest rate.

In a sit-down with Metropol CRB Chief Executive Officer Gideon Kipyakwai – interest rate depends on the historical borrowing character based on the borrower’s historical data.

Kipyakwai said RBP “allows lenders to use credit profile characteristics to charge borrowers interest rates that vary by credit quality.”

What it means as banks adopt Risk Based Pricing model
Metropol CRB Chief Executive Officer Gideon Kipyakwai

He adds that not all borrowers for a single product will receive the same interest rate and credit terms.

Also Read: How risk-based credit pricing model affects borrowers and banks

This means that higher-risk borrowers who seem less likely to repay their loans in full and on time will be charged higher rates of interest while lower risk borrowers who seem to have a greater capacity to make payments will be charged lower rates of interest.

Equity Bank for example, notified its customers of the rolling out of the RBP in a notice dated July 10, 2023.

The notice followed the adjustment of Central Bank of Kenya (CBK) revising its Central Bank Rate (CBR) from 9.5% to 10.5%.

“…we wish to inform our customers that we shall adjust loan interest rates to reflect a revised Equity Bank Reference Rate ( EBRR) of 14.69% plus a margin based on the customers credit risk with effect from 10th July 2023,” reads a notice from Equity bank..

RBP is fully realized through Credit Information Sharing (CIS) among financial.

“CIS has enabled lenders to do appropriate credit underwriting because at the end of the day when a customer borrows a bank will have limited information on the customer but through information sharing mechanism the banks are able to access the customer’s profile much more to see how much the customer is exposed to other loans in the industry,” added Dr. Tiriongo.

Kenyans whose credit scores are below the minimum required by lending institutions for loan consideration are, however, faced with a decision of having to borrow at a higher cost compared to those with credit scores are above average.

Metropol Credit Score

Metropol, a leading Credit Reference Bureau (CRB) in Kenya with presence in both Kenya and Uganda has a Metro Score which 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 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.

With a USSD code *433# an individual 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 pay back.

Monitor Your Business Transaction

Collins Ogutu

Nairobi based Digital Journalist, Corporate Communication Expert and Digital Marketer with a wealth of experience in multimedia. Accredited member of the Media Council of Kenya.

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