Kenya’s commercial banks have rejected a proposed loan pricing framework by the Central Bank of Kenya (CBK), warning that it could amount to the reintroduction of interest rate caps through the back door and threaten credit access, especially for small businesses.
The new proposal would require banks to peg lending rates to the Central Bank Rate (CBR), along with a fixed premium referred to as “K”. However, the Kenya Bankers Association (KBA) insists that the interbank rate—a market-based benchmark reflecting real-time liquidity—would serve as a more responsive and practical reference point.
The bankers said that they have pledged to disburse KSh 150 billion annually to small businesses from 2025, a target that would be unachievable under the proposed CBK model.
“Interest rate controls will drive banks to stop lending to segments of the economy that are perceived to be risky, such as small businesses and low-income individuals, stagnating economic growth and development, employment creation, and investment,” the lobby said.
At the heart of the disagreement is CBK’s plan to anchor lending rates to the Central Bank Rate (CBR) and impose a regulator-approved premium on top, effectively capping interest rates.
KBA argues that such a move contravenes Kenya’s legal framework for a liberalized interest rate regime and risks repeating the damaging credit contraction experienced between 2016 and 2019, when similar caps were in place.
The banking lobby is instead pushing for the adoption of the interbank rate as the base reference, citing its alignment with global best practices and its stronger reflection of market liquidity conditions.
“CBK will not operationalize the monetary policy decision after setting the CBR. Setting the CBR without triggering its transmission leads to misaligning market outcomes from the policy,” KBA acting CEO, Raymond Molenje said in a statement.
The 2016 interest rate cap, intended to lower borrowing costs, instead stifled credit flow as banks became more risk-averse. With fewer profitable lending options, banks shifted focus to low-risk borrowers, leaving SMEs and high-risk individuals with limited access to loans. The policy, which hindered economic growth and job creation, was repealed in 2019 after its unintended consequences became clear.
KBA contends that relying solely on the CBR, without activating supporting liquidity operations, could disconnect monetary policy from real market dynamics. The CBK’s silence on the operational framework for monetary policy— especially its stance on the interbank rate corridor — has also raised concerns about policy’s effectiveness.
Bankers also noted that the Central Bank Rate doesn’t accurately capture their true cost of funds, which they argued is shaped more by market forces than policy signals.
“The rate of return on commercial bank deposits is not benchmarked on CBR but rather the depositors’ assessment of the opportunity cost of investing in Government securities, which is reflected in the treasury bill rate,” KBA added.
The banking lobby argues that using the interbank rate allows for better transmission of monetary policy and offers flexibility in pricing loans based on actual operational costs and borrower risk. They also point out that their proposed model aligns with international benchmarks like SOFR in the U.S. and SONIA in the U.K., which are derived from short-term market rates, as evidence that market-driven frameworks support effective monetary policy transmission.
The two proposals are meant to find a new model to replace the Risk-Based Credit Pricing Model, which allows banks to price loans based on a combination of base rates, borrower risk, and additional charges. The model was aimed at embedding responsible lending, customer-centric business models, and ethical banking. The model
However, CBK’s assessment found that many banks had failed to implement the model as intended.
“some banks did not apply the model pricing to some credit facilities such as mobile loans, cash backed facilities, facilities under funded schemes and facilities under the Government-to-Government arrangements.” The Apex bank notes.
CBK also faulted the Risk-Based Credit Pricing Model for causing unrealistically high model outputs that forced banks to apply internal discounts, infrequent updates to cost variables, the imposition of unapproved charges like commitment fees and late penalties, and the lack of proper board oversight or credit pricing documentation.
Meanwhile, CBK is intensifying its crackdown on hidden charges in the pricing of loans with a landmark proposal that will, for the first time, compel mobile lenders to transparently outline all borrowing costs or face penalties.
This came as local lenders moved to court to lock out the National Treasury from having a say in how they price their loans.
The newly released consultative paper details plans to overhaul the existing risk-based lending model and subject the rapidly expanding mobile loan sector to stringent new disclosure requirements.
The regulator's review of the Risk-Based Credit Pricing Model (RBCPM), introduced in 2019, revealed widespread inconsistencies and the imposition of opaque "other charges" by commercial banks, obscuring the true cost of credit.
On-site inspections indicated a divergence from the model's intended application, with lenders often applying discounts to initial inflated rates.
A key focus of the proposed reforms is the elimination of these hidden fees, such as processing, negotiation, and commitment charges.
CBK is advocating for a revised framework where all lending-related expenses, shareholder returns, and borrower risk assessments are consolidated into a transparent premium added to a benchmark interest rate.
In a significant move targeting the burgeoning digital lending space, the CBK’s new regulations will mandate that mobile lenders clearly and comprehensively disclose all costs associated with their loans.
This marks the first time these lenders, often criticised for high and unclear fees, will be legally obligated to provide full transparency upfront.
Failure to comply with these disclosure requirements will result in penalties, the specifics of which are expected to be outlined following the consultation period.
