Kenyan industrial banks have rejected a proposal by the Central Financial institution of Kenya (CBK) to introduce a brand new mortgage pricing mannequin that will use the Central Financial institution Fee (CBR) because the benchmark for pricing credit score, paired with a lending premium referred to as “Ok”. As an alternative, they’re backing the interbank price— the speed at which banks lend to 1 one other—as a extra market-sensitive benchmark.
On Thursday, the Kenya Bankers Affiliation (KBA) mentioned it’s open to dialogue with CBK however opposes the brand new framework, which it labelled as a reintroduction of rate of interest caps by way of a again door. Kenya eliminated the rate of interest cap in 2019 after the coverage was blamed for constraining lending to SMEs and low-income debtors.
Whereas the CBK guarantees its proposal would convey transparency and defend debtors, lenders worry it might revive the pitfalls of price caps and dampen credit score development in an financial system the place companies are struggling to lift capital.
“KBA doesn’t help the CBK’s proposal to undertake the Central Financial institution Fee (CBR) as the only base reference price mixed with a regulated lending premium (“Ok”),” KBA mentioned in an announcement.
“The proposed price capping is harmful with out readability on the standards for reviewing the proposed ‘Ok”. Submitting to CBK the premium “Ok” for every buyer is impractical.”
KBA argued that CBK’s proposed framework is inconsistent with Kenya’s liberalised rate of interest regime and warned that the return to cost controls might distort the nation’s credit score market. Banks additionally questioned whether or not the mannequin aligns with the regulator’s financial coverage targets, saying it dangers weakening the hyperlink between coverage price modifications and precise lending situations.
KBA additionally cautioned that the mannequin might undermine the business’s dedication to develop credit score to small companies, claiming that banks have pledged KES150 billion yearly to SMEs between 2025 and 2025. It argued that the pricing would restrict lenders’ capacity to evaluate and worth debtors’ dangers successfully, limiting the move of capital to the sectors the reforms goal to help.
“Rate of interest controls will drive banks to cease lending to segments of the financial system which are perceived to be dangerous, stagnating financial development and improvement, employment creation, and funding,” KBA mentioned.
CBK’s push for a brand new credit score pricing formulation follows its frustrations over the banking sector’s reluctance to decrease rates of interest regardless of a number of reductions within the benchmark lending price since October 2024.
By pegging rates of interest on CBR, the Central Financial institution of Kenya hopes to enhance the transmission of financial coverage choices to debtors and push for transparency in a market that has been criticised for opacity.
