Introduction to Risk-based Pricing

Module overview

On 14th September 2016, the Banking Act was amended. It brought in the capping of loan interest rates at four (4) percentage points above the Central Bank Rate (CBR). The enactment of the law was anticipated to lower the cost of credit and consequently increase credit access to the public. However, the intended outcomes were not achieved. Instead, banks shifted to corporate and government lending. This led to an increase in higher processing fees for retail consumers and a decline in profitability for smaller banks. MSMEs were crowded out by the government and big corporates since they were deemed as high-risk borrowers. 

 

The Kenyan parliament enacted the legislation under the essence of consumer protection. The World Bank Group and experts from consulting firms, raised concerns about the negative implications that the interest rate capping would have on the Kenyan economy moreover, bringing sanity to the credit market. A number of studies on interest capping have been cited as covered in this module.

 

This module takes learners through the benefits of a free-market economy and the need for consumer protection. It also focuses on the banking sector charter 2019, and the credit infrastructure (CRBs) in place to encourage the use of risk-based pricing in making lending decisions.

Learning objectives

By the end of this module, you should have understood:

  1. The two market forces in a given country’s economy

  2. The introduction and effects of interest rate capping in the Kenyan economy

  3. The regimes with interest rate capping and its impacts

  4. Rationale and best practices in adopting risk-based pricing

  5. Models used in credit scoring