The Kenya Bankers Association (KBA) has opposed the Central Bank of Kenya’s (CBK) proposed changes to the credit pricing framework, warning that the reintroduction of interest rate controls would restrict lending to businesses and individuals, especially those deemed higher-risk.
- •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.
According to the banking lobby, CBK’s proposal will hinder their ability to extend credit, especially to MSMEs, undermining the state’s commitments to scale up lending in support of economic growth. 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.
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 The policy, which hindered economic growth and job creation, was repealed in 2019 after its unintended consequences became clear.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.
KBA’s Proposal
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. According to the consultative paper, “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 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.
