The Central Bank of Kenya (CBK) on April 23, 2025, announced plans to introduce changes to its current lending rate framework, known as the Risk-Based Credit Pricing Model (RBCPM), in turn scrapping the risk-based loan pricing model used by commercial banks.
Commercial banks have until May 2, 2025, to submit their feedback on the CBK’s consultative paper reviewing the risk-based credit pricing model.
Risk-based loan pricing is when banks charge different interest rates on loans depending on how risky they think a borrower is.
According to the CBK, unclear pricing mechanisms have resulted in high credit costs and reduced lending to the private sector.
The regulator has attempted to address this by lowering the base lending rate.
Also Read: 5 Common Types of Bank Loans in Kenya and How They Work
Banks oppose risk-based loan pricing review
However, the ongoing review of the risk-based pricing model for commercial bank loans continues to generate mixed responses from banks and the regulator.
The Kenya Bankers Association (KBA) argues that the impact of the changes in the central bank rate is only felt when the CBK implements monetary action such as liquidity injection or withdrawal to influence lending rates.
KBA Chief Executive Officer (CEO) Raymond Molenje warned about key risks in the current model.
“The CBK may set the CBR (Central Bank Rate) and wait for transmission without necessarily implementing it to affect market liquidity,” said Molenje.
He further emphasised that the banking sector’s focus should be on the interbank rate which obligates the CBK to implement policy to align market conditions with policy decisions.
Also Read: CBK Announces Plans to Change Lending Rate Model
Central Bank defends proposal
CBK Governor Kamau Thugge pointed out that the goal is to reform the model to address ongoing challenges in the credit market such as high lending rates and unclear pricing mechanisms by creating a market-driven framework for credit risk pricing.
“The reason I think that the CBR being the base rate is the right way is because it’s also forward-looking. The proposal by the banks is to average the last two months of the interbank rate but as I’ve just told you the interbank rate has been tracking very closely the CBR,” said Thugge.
The CBK argues that under its proposal banks would adjust their rates more promptly without relying on an average of past months when monetary condition may have been different.
However, bankers argue that this shift towards CBR and a controlled margin K (fixed margin) could amount to indirect interest rate capping.
“And we also want that K to be transparent when it is broken down into the cost of operation so in terms of lending how much does it cost what is the shareholder return and then finally the risk of the person you know if you don’t pay your loans you’ll be charged a higher rate,” the CBK Governor added.
The new proposal comes after the Central Bank lowered the CBR again following a Monetary Policy Committee (MPC) meeting which in turn results to Kenyans enjoying cheaper loans.
CBR is the interest rate at which the central bank lends money to commercial banks.
In a press release on Tuesday, April 8, the Central Bank announced that the committee lowered the CBR by 75 basis points to 10.00 percent from 10.75 percent, the lowest the benchmark has been since May 2023.
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