Kenya’s commercial banks have raised alarm over the Central Bank of Kenya’s (CBK) proposed risk-based credit pricing model, warning that it could stifle lending, especially to micro, small, and medium-sized enterprises (MSMEs). Through their umbrella body, the Kenya Bankers Association (KBA), the lenders argue that the proposed model reintroduces interest rate capping under the guise of regulatory oversight.
The CBK proposal would see the Central Bank Rate (CBR) form the base lending rate, with an added risk premium “K” component. This premium incorporates each bank’s operational lending costs, a return to shareholders, and a borrower-specific risk premium all subject to review and possible control by the CBK.
KBA CEO Raimond Molenje described the proposal as “an indirect interest rate cap,” akin to the policy in place between 2016 and 2019, which he said led to a significant reduction in private sector credit. “For all intents and purposes, the way the proposal has been made — that’s interest rate capping, which will not be known to the public. And unfortunately, that capping will be worse than what we were in during 2016–2019,” he warned.
Molenje further criticized what he termed as “verbal controls” from the regulator, which influence lending behavior without official documentation. He claimed that such regulatory ambiguity puts individual banks in a difficult position, unable to deviate from CBK’s informal guidance without repercussions.
KBA maintains that the current risk-based pricing framework has failed to achieve its intended outcomes. Despite being approved by the CBK, most banks are not applying the models because they lead to higher lending rates even when the CBR drops. This, the bankers say, contradicts the objective of lowering the cost of credit.
The bankers advocate for a transparent, flexible pricing model that reflects borrower risk and prevailing market conditions. They also caution that the exclusion of interbank market dynamics undermines the effectiveness of monetary policy.
KBA has urged policymakers to focus on economic fundamentals rather than formulaic pricing, which they argue will not address the root causes of high lending rates.
