The ongoing debate between the Central Bank of Kenya (CBK) and commercial banks over the base lending rate has sparked a lively discussion within Kenya’s financial sector. The central issue centers around CBK’s proposal to use the Central Bank Rate (CBR) as the base rate for pricing credit, while commercial banks are pushing for a more flexible approach.
CBK Governor Kamau Thugge introduced the proposal as part of a wider effort to reform the country’s risk-based pricing model, which has been blamed for high lending rates and a lack of transparency in pricing. According to Thugge, the aim is to create a more market-driven framework that addresses persistent challenges in the credit market. The CBK believes that the use of the CBR as a base rate, alongside a margin that reflects the borrower’s risk profile, will lead to lower costs of credit and increased access to loans, especially for the private sector.
However, commercial banks, represented by the Kenya Bankers Association (KBA), argue that simply lowering the base rate may not yield immediate results. KBA CEO Raimond Molenje emphasized that changes in the CBR need to be coupled with the CBK’s active involvement in managing market liquidity to effectively impact lending rates. Without proper monetary interventions, Molenje warns, the CBR alone won’t drive significant change.
The crux of the disagreement lies in the implementation of the CBR as the base rate. While CBK advocates for a forward-looking approach based on the CBR’s consistency with interbank rates, banks are concerned that such a policy could lead to a form of indirect interest rate capping. They argue that the formula for determining the margin “K” (reflecting credit risk) should be transparent, taking into account operational costs, shareholder returns, and the risk posed by individual borrowers.
Economists, such as Churchill Ogutu, also caution that the new model could introduce competition among banks and other financial institutions, providing consumers with more choices but potentially muddying the waters for borrowers seeking clarity in loan pricing.
As the deadline for feedback approaches, the debate continues to unfold, with experts suggesting that retaining the CBR as the base lending rate may offer the most balanced and productive solution.
