Kenyan commercial banks have voiced strong opposition to the Central Bank of Kenya’s (CBK) proposed loan pricing framework, which seeks to anchor lending rates to the Central Bank Rate (CBR) alongside a regulated premium known as “K”. The banks, represented by the Kenya Bankers Association (KBA), argue that the model threatens the country’s liberalised interest rate regime and risks introducing interest rate caps through a regulatory back door.

Under the CBK’s plan, credit pricing would be standardized across institutions using the CBR as the base reference rate, with an additional lender-specific premium “K” submitted to the regulator. While the CBK contends that this framework would enhance transparency, ensure consumer protection, and strengthen the transmission of monetary policy, the banking sector warns that it could lead to unintended consequences.

“KBA does not support the CBK’s proposal to adopt the CBR as the sole base rate, combined with a regulated lending premium,” the association stated, warning that the framework would undermine risk-based lending and revive the challenges associated with previous rate capping policies, which were repealed in 2019.

Banks favour the interbank lending rate as a more market-driven benchmark, arguing it reflects real-time market conditions and aligns with monetary policy dynamics. They also caution that submitting a lending premium “K” for each borrower to the regulator is operationally impractical and lacks clarity on how risk differentiation would be handled—key to effective compliance management and internal controls.

The KBA further emphasized that the proposal could restrict access to finance for small and medium-sized enterprises (SMEs)—a sector that banks have committed to support with KES150 billion annually from 2025. Reintroducing a compliance-enforced pricing cap, they argue, would force lenders to withdraw from riskier segments, exacerbating credit inequality and undermining financial inclusion.

“Interest rate controls will drive banks to stop lending to segments perceived as high-risk, limiting investment, job creation, and broader economic development,” KBA warned.

The CBK, however, is pushing for the model in response to banks’ reluctance to lower lending rates, despite multiple cuts in the benchmark rate since October 2024. The regulator insists that tying interest rates directly to the CBR will foster market transparency, ensure that monetary policy decisions are effectively transmitted, and curb opaque pricing practices in the credit market.

This standoff signals deeper tensions between regulatory enforcement and market liberalization, raising questions about how to balance consumer protection with the need for dynamic and risk-sensitive credit markets. As Kenya’s financial ecosystem continues to evolve, stakeholders are calling for regulatory consultation, compliance flexibility, and data-driven oversight tools to ensure reforms support sustainable credit growth without unintended distortion.

As part of ongoing deliberations, KBA has indicated its willingness to engage with the CBK to develop a mutually beneficial model that preserves regulatory integrity while enabling the banking sector to serve diverse economic segments, particularly underserved communities.