The Central Bank of Kenya is shaking up how credit is priced. In a sweeping reform proposal, CBK wants to anchor all loan pricing to the Central Bank Rate (CBR), scrapping the fragmented risk-based lending models currently used by banks.
This move isn’t just about technical adjustments; it’s a power shift. The goal? More transparency, tighter regulation, and fairer rates for borrowers. But the big banks aren’t thrilled. Critics say it could flatten profits and restrict credit to “riskier” borrowers.
A Brief Background: From Caps to Chaos
There was the Kenya Bankers Reference Rate (KBRR) introduced in 2014 to enhance transparency. But it was suspended in 2017, partly because banks weren’t fully on board and partly due to the unintended complexity of its application.
Then came interest rate caps, a populist move aimed at protecting borrowers from expensive costs but which had the side effect of limiting credit access, especially for small and medium-sized enterprises (SMEs). These caps were repealed in 2019.
Since then, the Risk-Based Credit Pricing Model (RBCPM) has been in place. It allowed banks to set rates based on a borrower’s risk profile. In theory, it was supposed to lead to fairer and more efficient pricing.
In practice, it created a divided system full of inconsistencies and loopholes. The CBK found that some banks were misapplying the model, imposing hidden charges, or failing to tailor rates to individual risk profiles at all.
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The Proposed Reform: Anchoring Rates to the CBR
The CBK’s new proposal is centred on one major shift: making the Central Bank Rate the foundation for all lending in Kenya.
This means that instead of banks developing their own internal benchmarks and risk calculations often hidden from public scrutiny, all lending rates would start with the CBR.
On top of this base, banks would add a clearly defined premium, called “K”,which would account for their operating costs, expected return to shareholders, and a borrower-specific risk premium.
Importantly, banks would need to submit this “K” to the CBK for review and public disclosure.
This system promises greater transparency, standardisation, and accountability. Borrowers would finally have a clear sense of how their interest rate is calculated and could compare offers from different banks more easily.
Why CBK Thinks It’s Necessary
The central bank’s motivation is clear: restore fairness, enforce discipline, and improve monetary policy transmission.
When interest rates float too far from policy intentions, monetary interventions like rate cuts or hikes become ineffective.
By aligning lending with the CBR, the CBK ensures that monetary policy has the intended real-world impact on borrowing and spending.
Additionally, anchoring loan pricing to the CBR eliminates hidden biases and protects consumers from arbitrary pricing.
The CBK observed that under the RBCPM, some banks were pricing loans using outdated models or historical deposit costs, which caused loan rates to remain high even when the CBR dropped.
Others applied blanket rates for segments rather than assessing individual risk, undermining the model’s intent.
By introducing a single reference point, the CBK hopes to drive competition not on random interest rates but on service quality, product innovation, and customer experience.
But Not Everyone Is Applauding
Predictably, banks aren’t thrilled. While the proposal doesn’t impose caps, it does place more oversight and transparency requirements on how banks arrive at their pricing.
That means less room for manoeuvring and potentially lower profits, especially from high-risk loans where premiums previously covered more than just risk.
Critics also warn that the reform could make banks more risk-averse. If they’re limited in how much risk premium they can charge, they may reduce lending to customers perceived as higher risk, typically informal sector workers, small businesses, or first-time borrowers.
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This could unintentionally hurt financial inclusion, the very thing CBK has long championed.
Then there’s the practical challenge: transitioning existing loans to the new model within three months of implementation. Banks will need to overhaul systems, recalculate rates, and communicate changes to customers.
Balancing Control and Credit Access
The CBK is walking a tightrope. On one side is the need for a well-regulated, transparent, and efficient credit system.
On the other is the risk of stifling innovation, profitability, and access to credit for the very groups that most need it.
Anchoring lending to the CBR is not without precedent. Many countries, from India to Brazil, use their policy rate as the benchmark for loan pricing.
The key difference lies in how flexibly banks can adjust their margins and how transparently they report them. In this regard, the CBK is proposing not just regulation but also visibility.
As Kenya walks a tightrope between financial inclusion and monetary control, this reform could redefine the very cost of borrowing and who gets to decide it.
Ronnie Paul is a seasoned writer and analyst with a prolific portfolio of over 1,000 published articles, specialising in fintech, cryptocurrency, and digital finance at Africa Digest News.
