- KCB Group chief executive Joshua Oigara spoke to the Business Daily on implications of the return of risk-based pricing of loans and its impact on lending.
KCB #ticker: KCB is the second tier-one bank to disclose that it is preparing to return to pricing loans based on the perceived risk of default for individual borrowers subject to approval by the Central Bank of Kenya.
KCB Group chief executive Joshua Oigara spoke to the Business Daily on implications of the return of risk-based pricing of loans and its impact on lending, his term at the bank and the plan for the Democratic Republic of Congo.
WHAT IMPACT DO YOU THINK THE RETURN OF RISK-PRICED LENDING WILL HAVE ON SME LENDING?
Risk-priced lending is a good innovation for the financial sector not just here but elsewhere because we have seen experiences in other markets.
What it will do is allow SMEs to borrow for a longer term to meet their cash flow needs as opposed to mobile borrowing, which is very short-term. You also need to get a higher borrowing limit.
Those SMEs did not have a chance to have an equivalent product because the mobile loan is payable within a maximum of six months. What I expect is that those customers will take higher tickets, get longer tenure to pay and increase their credit portfolio.
WHAT ARE YOUR EXPECTATIONS OF LOAN CHARGES AFTER YOU GET APPROVAL FOR RISK-BASED LENDING?
We expect to get final approval this week or next week. There’s latent demand for the new model. It has been a work in progress for 24 months. Remember after the regime of interest caps, we were not able to price the risks for clients.
What it does is that it gives you new lending opportunities. The discussions are around bringing in some additional risk premiums. What I have seen is a misunderstanding that increasing the pricing will make it difficult for customers to borrow. Actually, it will bring in more clients into opportunities for lending.
YOU GREW YOUR LOAN BOOK AT 13.5 PERCENT LAST YEAR. HOW IS THIS MODEL LIKELY TO DRIVE GROWTH IN LOANS GOING FORWARD?
We believe that our credit growth will be in a range of between 15 and 20 percent once we get this approval. But what we are waiting for is to classify different segments. Remember initially we had one different price – like we had all customers at the same (interest) rate. Today, we have to distinguish.
HOW HAS THE MOVE TO SUSPEND NEGATIVE LISTING OF DEFAULTED LOANS OF BELOW SH5 MILLION WITH CREDIT REFERENCE BUREAUS FOR A YEAR AFFECTED NEW SME BORROWING AND REPAYMENTS?
We have not seen a significant impact on our business in terms of repayments. If you look at our NPL ratio for our SMEs, it has come down by 5.4 percent compared to the same time last year.
We were also able to grow our SME portfolio last year by 48 percent year-on-year basis. I believe a lot of the SMEs have adapted. What we are doing is to increase credit to existing clients.
In the last year, we were not acquiring new clients. Now, with a new pricing model coming in, we have a chance to go look for clients who were not borrowing before.
HOW HAS THAT SUSPENSION OF NEGATIVE CRB LISTING AFFECTED MOMENTUM IN MOBILE LENDING?
There’s still momentum for growth. We have seen the expansion of 20 percent today in that portfolio. It will continue to grow. I do not believe that banks are relying very much today on the listing of smaller borrowers to lend.
The average loan per capita for these customers is around Sh5,000, Sh10,000 and Sh15,000. We have enough data to drive the algorithms to give us the results we need.
YOU ARE AMONG THE SEVEN BANKS LENDING UNDER A STATE-BACKED CREDIT GUARANTEE SCHEME FOR SMES. WHAT HAS THE UPTAKE BEEN LIKE?
It has been exciting to see our SMEs who borrowed last year increased by 100 percent, but not all of them borrowed under the credit guarantee scheme.
The limit we have is Sh500 million against our book for SMEs which is about Sh76 billion. So it’s a very small percentage. My belief is whereas this is not very significant, our credit guarantee scheme portfolio is growing.
WHAT ARE THE KEY CHALLENGES OF THE CREDIT GUARANTEE SCHEME?
The key aspect is how customers have understood the credit guarantee scheme. It is brand new in the market and not all of us (banks) are applying it. There are also limits on how much a customer could borrow to qualify. It’s not open-ended.
The maximum is Sh5 million. But there are other SMEs who require more than that amount to borrow. There are also conditions on if you default, how do you come in and make a claim. That’s a year later.
One of the limitations is also to increase the credit guarantee scheme from the current Sh3 billion, which is in the budget, to Sh10 billion and Sh30 billion thereafter by bringing in international partners.
WHAT IS THE LATEST ON YOUR PLAN TO ENTER THE DRC?
We do not believe that going to establish a bank from the beginning as a green-field is an option for us.
As a group, my expectation is that as we go into the second half of the year before the end of September, we should have finalized our discussions and we should be able to come to the market and say ‘we have a deal’. This will be within the next six months.
ARE YOU LOOKING FOR POTENTIAL ACQUISITIONS IN TANZANIA AFTER TALKS WITH AFRICAN BANKING CORPORATION TANZANIA (BancABC) COLLAPSED LAST NOVEMBER?
Our priority this year remains finalizing our entry strategy into DRC. We came out of the discussions we had with BancABC in Tanzania. We are in the early stages of explorations. I do not see we will conclude any discussions until the end of the next financial year.