Banks Oppose Proposal to Cap Lending Rates Using CBR

Kenyan banks have opposed a proposal by the Central Bank of Kenya’s (CBK) to adopt the Central Bank Rate (CBR) as the sole base reference for pricing loans, with a fixed premium (“K”) added to determine final lending rates.

Kenya Bankers Association (KBA), which promotes reliability and professionalism in the banking sector, says it does not support the proposed model of combining CBR with a regulated lending premium.

This even as the association confirmed it still appreciates the regulator’s continued consultation with industry stakeholders on credit pricing reforms.

According to the association, the said the premium “K” would encompass banks’ operating costs related to lending, returns to shareholders, and the risk profile of individual borrowers.

“We appreciate the Central Bank of Kenya’s continued engagement with stakeholders on credit pricing reforms. However, 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’),” said KBA Chief Executive Raimond Molenje in a statement.

Molenje cautioned the model could limit banks’ ability to effectively price risk and deliver on their commitment to advance Ksh.150 billion annually in new loans to small businesses between 2025 and 2027.

He is recommending the adoption of the interbank rate as a more market-driven and globally aligned base rate.

He argues the move would allow banks the flexibility to price loans based on different risk profiles and customer segments.

“The banking industry remains committed to working with CBK to enhance credit pricing transparency, ensure sustainable lending, and expand access to affordable credit for all Kenyans.”

Also Read: CBK to Revise Loan Pricing Model to Align with Market Realities

CBK is looking at revising the Risk-Based Credit Pricing Model (RBCPM), initially introduced in 2019 in collaboration with the banking sector.

On April 23, the apex bank announced the contentious proposal, in which it said there’s the need to align credit pricing with current market realities while promoting transparency and responsible lending.

“CBK proposes the use of the policy rate (Central Bank Rate) as the common reference rate for determining lending rates in the Kenyan market. The Central Bank Rate reflects the cost of funding to the banks,” the notice reads in part.

The proposals have been subjected to public review and submission of feedback.

Risk-Based Pricing allows banks to assign interest rates based on a borrower’s individual credit risk profile.

Borrowers with poor credit history or higher risk are charged higher interest rates, while those with good credit standing benefit from lower rates and more favorable credit terms.

The approach promotes responsible borrowing and lending practices by ensuring that not all customers pay a flat rate for the same loan product.

May 2, 2025

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Collins Ogutu

Nairobi based Digital Journalist, Corporate Communication Expert and Digital Marketer with a wealth of experience in multimedia. Accredited member of the Media Council of Kenya.