Tensions are building between the Central Bank of Kenya (CBK) and local banks following a heated disagreement over the CBK’s new approach to lending rates, a move that could change how easily Kenyans access loans.
CBK Signals Major Shift Away from Risk-Based Credit Pricing
The conflict stems from the CBK’s recent announcement that it plans to move away from the Risk-Based Credit Pricing Model (RBCPM), which has been in use since 2019.
In response, the regulator asked banks to submit their feedback on a review paper outlining the proposed changes, with a deadline set for May 2.
CBK Governor Kamau Thugge said the reforms aim to tackle persistent issues like high interest rates and unclear loan pricing by introducing a market-driven system for setting credit risk prices.
The Rise and Fall of the Risk-Based Model
The RBCPM was introduced jointly by CBK and the banking sector as a solution to problems like high lending rates and unfair loan pricing.
However, over the years, several weaknesses in the model have become clear. Many banks either failed to adopt the model properly or used it in ways that resulted in sky-high interest rates for borrowers.
Additionally, CBK discovered that some banks were charging fees outside the approved RBCPM structure, raising serious concerns about transparency and fair practice in the credit market.
New Model: CBR and the ‘K’ Premium to Lead Loan Pricing
As part of its proposed overhaul, the CBK wants to make the Central Bank Rate (CBR) the official benchmark for determining loan interest rates.
Under this system, banks would simply add a set margin — known as the “K” premium — to the CBR when setting their lending rates.
To enhance transparency, CBK also pledged to publish the details behind each bank’s “K” value online, giving borrowers clearer insight into how their loan rates are determined.
Banks Push Back, Demand Market-Based Flexibility
However, these changes have not been warmly welcomed by the banks. Through the Kenya Bankers
Association, lenders have raised concerns that the new model would only work if CBK also introduced measures to adjust liquidity in line with market movements.
Banks argue that the interbank rate — which reflects the actual cost of funds between banks — would be a better benchmark than the CBR.
They also prefer to calculate their “K” premiums independently, without CBK oversight, to accurately account for each bank’s unique risks and operating expenses.
According to the banks, linking lending rates too closely to the CBR with a controlled margin could result in a situation similar to interest rate caps, something the sector has previously fought against.
What the Future Holds for Borrowers and Banks
The final decision in this standoff could have major consequences for both borrowers and financial institutions.
If CBK’s proposals move forward, Kenyan borrowers could benefit from more transparent, predictable, and possibly lower loan rates.
On the other hand, banks could find themselves under pressure to adjust their risk models, manage their profitability, and operate within tighter margins in a more heavily regulated environment.
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