Central Bank of Kenya. Photo | Courtesy.
Commercial banks are pushing for a change in how loans are priced, proposing that the Central Bank of Kenya (CBK) adopt the interbank rate as the new benchmark. If accepted, the proposal would see the current risk-based pricing model which allows each bank to set its own base rate replaced with a more unified, market-driven approach.
Through the Kenya Bankers Association (KBA), lenders argue that the current system has failed to respond adequately to monetary policy cues, including changes to the Central Bank Rate (CBR). They say this has led to inefficiencies in how interest rate cuts or hikes are transmitted to consumers.
The proposal recommends using a two-month average of the interbank rate, topped with a risk-based premium, as a standard industry-wide base rate. According to the KBA, this would increase pricing transparency and ensure consumers benefit more directly from CBK’s monetary policy decisions.
The CBK recently moved to stabilize the interbank market by tightening the interest rate corridor to ±0.75 percentage points around the benchmark rate, effectively keeping interbank rates between 9.25% percent and 10.75percent. This adjustment aligns the interbank rate more closely with the CBR, currently at 10 percent.
CBK has acknowledged the inefficiencies in the current pricing mechanism and is reportedly considering reviving a modified version of the Kenya Bankers Reference Rate (KBRR), which was in use from 2014 to 2016. The KBRR was discontinued due to volatility and poor implementation.
A shift back to a benchmark like the KBRR would mark a structural policy change aimed at improving monetary policy transmission and potentially lowering borrowing costs. Banks have also suggested piloting the new model to assess its effectiveness before full rollout.
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However, analysts warn that the model’s success hinges on its implementation. Kenya’s previous attempt with the KBRR collapsed due to wide interest margins and lack of enforcement. There are concerns that if not properly regulated, the proposed benchmark could replicate past challenges especially for smaller lenders who face higher costs in the interbank market.
With non-performing loans (NPLs) still above 15 percent, there is also the risk that banks may inflate their risk premiums, negating the intended benefits of a lower base rate.
Experts argue that for the model to work, banks must be required to disclose the full pricing formula for each loan product, set clear caps on margins, and comply with stricter monetary transmission guidelines. More broadly, reforms to deepen and liberalize the interbank market are seen as essential to ensuring the new system functions as intended.
If successful, the move could help improve credit access and affordability in a market that has long struggled with high lending rates and weak policy transmission.
