Assessment of the Use of Risk-Based Pricing of Mortgage Loans by Commercial Banks in Lesotho

Abstract

The prevalence of highly restructured loans in Lesotho raises concerns about impeded economic growth. To address this concern, this study investigated the use of risk- based pricing of mortgage loans by commercial banks in Lesotho. The objectives were to examine (i) the parameters used by commercial banks when pricing mortgage loans, (ii) challenges commercial banks encounter in implementing risk-based pricing and (iii) exploring ways in which commercial banks in Lesotho may efficiently adopt risk-based pricing for mortgage loans. The study was quantitative and employed a survey research design to collect primary data. Purposive and convenience sampling criteria were used to select experts in the areas of mortgage loans. These sampling techniques yielded a sample of 63 respondents (37 males and 26 females). Experts were primarily from regulatory authorities and banks, with additional representation from finance professionals. Data were collected using a structured questionnaire and analysed using descriptive, factor and correlation analysis. In terms of objective one, the results show that commercial banks in Lesotho use borrower income level, borrower credit score, employment type, loan-to-value ratio, cost of capital, property location and value, and cost of funds to price mortgage loans. As for the second objective, the main challenges in implementing risk-based pricing on mortgage loans include operational factors: insufficient staff training on risk-based pricing models, inconsistent borrower credit history and lack of credit scoring and data analytics tools. Regarding the third objective, this study shows that efficient adoption of risk-based pricing on mortgage loans should consider an investment in advanced credit scoring models, educating borrowers about risk-based pricing, training staff on risk management, and strengthening regulatory requirements for transparency. This study contributes to risk-based mortgage pricing literature, providing insights for Lesotho’s banks, policymakers, and regulators to enhance the national financial system.