Central Bank of Kenya Governor Kamau Thugge. Photo | Kenya Banking Insights.
The Kenya Bankers Association (KBA) has rejected the Central Bank of Kenya’s (CBK) proposed move to cap lending rates under a revised risk-based credit pricing model, saying it will restrict access to credit and disrupt the banking sector’s role in supporting economic growth.
In a statement released on April 30, KBA said the proposed model which pegs loan pricing on the Central Bank Rate (CBR) with a capped premium (‘K’) echoes the failed interest rate cap regime of 2016-2019 and would have severe negative consequences on borrowers, particularly small businesses.
“The proposed interest rate capping by CBK is not supported in law and would have the following effect: reduced lending to Kenyans and businesses, especially MSMEs,” the association warned.
KBA also criticized CBK for abandoning the interbank market corridor as a monetary policy tool, noting that this change would weaken the transmission of policy signals and increase volatility in credit markets.
“In its proposal, CBK is silent on the interbank market corridor as the monetary policy implementation framework ignoring the interbank rate sets the stage for more frequent misalignments of CBR being mismatched with market conditions.”the statement reads.
KBA CEO Raimond Molenje emphasized that the premium ‘K’ should reflect a bank’s actual cost of lending.
“Beyond the base rate, ‘K’ should be allowed to fully reflect banks’ risks, expected return on investment, and customer risk,” Molenje said.
The association argued that the capped model would make it difficult for banks to lend during times of market stress or tight liquidity, thus disrupting the flow of funds to businesses and households.
“Fixing the premium ‘K’ for each customer is unworkable in the current operating environment,” KBA stated.
KBA has instead proposed the use of interbank rates as the base reference rate, saying they are more market-aligned and reflect real-time liquidity conditions.
“Global best practice shows that market-based rates are derived from short-term interbank markets,” the association said, citing rates like SOFR (U.S.), SONIA (UK), and EURIBOR (EU).
By rejecting CBK’s model, KBA insists it is not opposed to risk-based pricing, but it calls for a framework that reflects market dynamics.
“The banking industry is ready to engage and work with CBK on developing a framework that will ensure flexible and affordable credit flow to Kenyans,” Molenje added.
