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Equity Group Holdings, East Africa’s largest financial services conglomerate led by Kenyan banking magnate James Mwangi, has implemented a risk-based pricing mechanism as part of its efforts to boost credit access to small businesses and individuals who have previously struggled to obtain formal credit.
The move represents a shift away from negative defaulter listings and toward a new credit score rating system that does not deny credit to borrowers based on the strength of their credit bureau reference scores.
Equity will now join the five other banks that have been given the go-ahead for risk-based lending, almost three months after Kenyan President William Ruto instructed the Central Bank of Kenya (CBK) to abolish the practice of blacklisting prospective borrowers in favor of a scoring system based on their creditworthiness.
In accordance with the risk-based lending model, the bank is permitted to add a premium to cover lending to customers who are deemed to be risky. The interest rate will be determined using the Equity Bank Reference Rate (EBRR) plus a margin determined by the customer’s risk profile.
The bank claims that the nation’s continuing drought as well as the economy’s overall performance have caused interest rates to rise by an amount never before seen, raising the cost of doing business.
“We have endeavored to cushion members by maintaining the prevailing interest rates despite the challenges in the economy,” Equity stated. “Consequently, the final Interest Rate shall be Equity Bank’s Reference Rate (currently at 12.52 percent) plus a margin per annum, this mechanism shall apply to all new Kenya Shilling denominated credit facilities.”
Equity Group Holdings Limited is a leading financial services conglomerate located in Nairobi, Kenya’s capital and largest city. It operates through subsidiaries in Uganda, Tanzania, South Sudan, Rwanda, and the Democratic Republic of the Congo, in addition to its Kenyan operations.
Mwangi, who has been instrumental in the growth and transformation of Kenya’s financial services industry, owns a sizable 3.38-percent stake in Equity Group.
A week ago, Equity announced plans to offer creditworthy small traders under the government-backed Hustlers Fund a revolving financing worth Ksh250 billion ($2.1 billion).
According to the group, micro- and small-sized businesses will be eligible for up to three times more credit under its $2.1-billion fund if they repay at least two loans from the government’s Ksh50 billion ($410 million) financial inclusion fund on time.
