By John Kariuki
In a bold endorsement of financial sector reform, digital lender Jijenge Credit Limited has thrown its weight behind calls for a standardized base lending rate, a move spearheaded by commercial banks to streamline interest rate determination. The firm argues that adopting a unified rate will inject much-needed predictability into the lending ecosystem, fostering stability for both borrowers and financial institutions.
Peter Macharia, CEO of Jijenge Credit, stressed the urgency of adopting a scientific and objective loan pricing model that aligns with global banking best practices. He highlighted that such a framework would optimize financial resource allocation, ensuring that borrowers are better served while reinforcing the nation’s economic resilience.
“It is imperative to construct a scientific and objective loan pricing model to keep pace with the competitive rhythm of commercial banks in mature economies. This will ensure financial resources are allocated efficiently while protecting market stability,” Macharia remarked during an industry forum on Tuesday.
He further elaborated on the mechanics of loan pricing, noting that banks employ a base rate as a benchmark, to which they add a margin—commonly referred to as the spread—to determine the final interest rate for borrowers. However, under the current risk-based pricing framework, interest rates vary widely, leading to market inefficiencies and inconsistencies.
Commercial banks are currently engaging the Central Bank of Kenya (CBK) in discussions to overhaul loan pricing models and establish a unified base lending rate. This follows concerns that banks have not been adjusting interest rates in tandem with reductions in the Central Bank Rate (CBR), a discrepancy that has raised alarms across the financial sector.
Macharia concurred with the sentiment that the existing risk-based pricing model lacks the adaptability required for market fluctuations. He attributed the high cost of loans to this rigid pricing mechanism, warning that it has led to a surge in business closures and increased asset repossessions.
“One of the major challenges facing Kenya’s economy today is the prohibitive cost of credit, which has rendered many businesses unsustainable. This explains the rising number of foreclosures and vehicle repossessions due to borrowers struggling to meet their financial obligations,” Macharia noted.
The Central Bank of Kenya has been actively working on a new loan pricing framework and is poised to present it for public consultation. CBK Governor Kamau Thugge revealed that a formal proposal will be unveiled within a fortnight, incorporating international best practices tailored to Kenya’s unique economic landscape.
“I hope within the next two weeks we will have a concrete proposal. We are studying global models and adapting them to suit our domestic financial ecosystem,” Dr. Thugge stated during a recent parliamentary committee hearing.
Banks have long lobbied for a transition from risk-based pricing to a common reference rate, contending that the existing model creates undue complexity and inconsistencies within the industry. Ideally, a base rate serves as the foundation upon which banks calculate interest rates for loans, mortgages, and other credit products. A hike in the base rate typically translates to higher borrowing costs, whereas a reduction should theoretically lead to lower interest rates.
This ongoing reform push comes in the wake of several commercial banks slashing lending rates following CBK’s decision to cut both the benchmark Central Bank Rate (CBR) to 10.75 percent and the Cash Reserve Ratio (CRR) to 3.25 percent. The apex bank has implemented a cumulative 225-basis-point reduction in the CBR since August last year, marking a strategic shift towards a more accommodative monetary policy stance.
In February, CBK mandated that banks align their lending rates with the revised monetary policy framework, warning of regulatory action against non-compliant institutions.
As the financial sector braces for transformative policy shifts, the call for a standardized base lending rate is gaining traction. Industry players, including Jijenge Credit, view this move as an essential step towards fostering a more predictable and sustainable credit market—one that balances the interests of borrowers and lenders while bolstering economic growth.
0 $type={facebook}:
Post a Comment
Note: Only a member of this blog may post a comment.