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Kenyan Loan Defaulters To Pay More Interest Rates

BY Getrude Mathayo · November 7, 2022 01:11 pm

KEY POINTS

“The metric with the highest weight – between 40 and 45 percent, is your payment performance. It has the highest impact on your credit score," Metropol, one of Kenya's leading CRBs stated.

KEY TAKEAWAYS

The Central Bank of Kenya will have to approve the proposed credit frameworks that will give banks the go-ahead to start applying the risk-based lending model.

Loan defaulters with poor repayment reputations will be forced to dig deeper into their pockets and pay more interest in the new lending framework while those who repay their loans in time will enjoy lower interest on loans.

The habit to borrow from multiple lenders and the type of job are among the factors that will determine how expensive lenders charge borrowers once banks roll out a credit framework that ends the blacklisting of defaulters.

Lenders will no longer deny borrowers loans because of their bad repayment reputation, but will rather charge them high-interest rates.

This arrangement, which is in line with the reviewed credit framework that stops loan defaulters from being blacklisted by the Credit Reference Bureau (CRB), will kick off once it has been approved by the Central Bank of Kenya.

However, lenders say the key consideration in the risk-based lending model will be an evaluation of an individual’s three-year credit history to determine the interest rates.

“The metric with the highest weight – between 40 and 45 percent, is your payment performance. It has the highest impact on your credit score,” Metropol, one of Kenya’s leading CRBs stated.

Metropol CEO Gideon Kipkyakwai stated that the new framework would punish loan defaulters who tend to have a habit of not repaying their loans.

“We do score forward-looking to see your probability of default and, therefore, compute your expected credit loss when you default. This enables the bank to then raise the risk and, therefore, load another one or two percent (on the interest rate). The two key attributes will be the willingness and ability to pay. If the willingness to pay is not there, it will take time to convert such people,” Kipkyakwai stated.

On the other hand, those who have a reputation for repaying loans in good time will enjoy low-interest rates, with one’s credit history becoming the new main determinant of the cost of loans.

The new framework is a result of pressure exerted by President William Ruto since his inauguration, as he accused lenders of locking out Kenyans from their products, citing an existing credit rating framework that largely focused on blacklisting defaulters.

The Central Bank of Kenya will have to approve the proposed credit frameworks that will give banks the go-ahead to start applying the risk-based lending model.

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