Kenyan commercial banks have rejected a proposal by the Central Bank of Kenya (CBK) to introduce a new loan pricing model that would use the Central Bank Rate (CBR) as the benchmark for pricing credit, paired with a lending premium known as “K”. Instead, they are backing the interbank rate— the rate at which banks lend to one another—as a more market-sensitive benchmark.
On Thursday, the Kenya Bankers Association (KBA) said it is open to dialogue with CBK but opposes the new framework, which it labelled as a reintroduction of interest rate caps through a back door. Kenya removed the interest rate cap in 2019 after the policy was blamed for constraining lending to SMEs and low-income borrowers.
While the CBK promises its proposal would bring transparency and protect borrowers, lenders fear it could revive the pitfalls of rate caps and dampen credit growth in an economy where businesses are struggling to raise capital.
“KBA does not support the CBK’s proposal to adopt the Central Bank Rate (CBR) as the sole base reference rate combined with a regulated lending premium (“K”),” KBA said in a statement.
“The proposed rate capping is dangerous without clarity on the criteria for reviewing the proposed ‘K”. Submitting to CBK the premium “K” for each customer is impractical.”
KBA argued that CBK’s proposed framework is inconsistent with Kenya’s liberalised interest rate regime and warned that the return to price controls could distort the country’s credit market. Banks also questioned whether the model aligns with the regulator’s monetary policy goals, saying it risks weakening the link between policy rate changes and actual lending conditions.
KBA also cautioned that the model could undermine the industry’s commitment to expand credit to small businesses, claiming that banks have pledged KES150 billion annually to SMEs between 2025 and 2025. It argued that the pricing would limit lenders’ ability to assess and price borrowers’ risks effectively, limiting the flow of capital to the sectors the reforms aim to support.
“Interest rate controls will drive banks to stop lending to segments of the economy that are perceived to be risky, stagnating economic growth and development, employment creation, and investment,” KBA said.
CBK’s push for a new credit pricing formula follows its frustrations over the banking sector’s reluctance to lower interest rates despite multiple reductions in the benchmark lending rate since October 2024.
By pegging interest rates on CBR, the Central Bank of Kenya hopes to improve the transmission of monetary policy decisions to borrowers and push for transparency in a market that has been criticised for opacity.
