Commercial banks in Kenya are negotiating with the Central Bank of Kenya (CBK) to overhaul their loan pricing models and establish a common base lending rate.
According to the lenders, their current risk-based pricing systems have proven unresponsive to the CBR reductions implemented over the past six months.
Stanbic Bank Kenya CEO Joshua Oigara, who sits on the Kenya Bankers Association governing council, revealed that the industry is advocating for a return to a common reference rate similar to the Kenya Bankers Reference Rate that was phased out in 2016.
According to Mr. Oigara, current models are "not sensitive enough" to CBR changes due to their structure of averaging components like CBR, return on equities, customer risk profiles, and bank margins over a 12-month period.
This initiative comes amid heightened scrutiny from CBK Governor Kamau Thugge's administration, which has warned of penalties for banks failing to reduce lending rates in accordance with their approved models following four CBR cuts in six months.
The proposed overhaul, occurring just two and a half years after banks received approval for their current risk-based pricing models following the end of the interest rate cap regime, aims to resolve the standoff between banks and the regulator while potentially improving credit flow to the private sector, which has recorded negative growth for the first time since 2002.
The CBK will have the final say on whether to approve this industry-proposed restructuring of loan pricing mechanisms.
Meanwhile, Kenya's Treasury was forced to pay Sh19.3 billion ($149.9 million) to eight commercial banks after Kenya Airways (KQ) defaulted on its loans, despite offering the lenders a 6.5-year bond as an alternative settlement option.
The banks, including Equity Bank, NCBA Bank, and Cooperative Bank, issued a default notice that threatened Kenya's sovereign credit rating, compelling the government to make an emergency cash payment on January 3 without parliamentary approval.
Treasury Cabinet Secretary John Mbadi disclosed that the amount has since been included in the supplementary budget currently under parliamentary review, and will be treated as a shareholder loan to be negotiated with KQ during the first half of 2025.
The government, which holds a 48.9% stake in the airline, had previously guaranteed both a $42 million loan and $132 million in letters of credit issued by the eight banks to KQ suppliers and aircraft leasing firms.
Despite posting its first half-year profit in over a decade with Sh513 million in the first half of 2024, KQ continues to struggle with negative equity of Sh123.6 billion, making it challenging to attract a strategic investor.
This latest financial intervention follows a 2017 debt-to-equity conversion where ten banks acquired a 38.1% stake in the airline through a special vehicle, while the government increased its shareholding from 29.8% to 48.9%, and Air France KLM's stake was diluted from 26.7% to 7.8%.
