The Central Bank of Kenya and Kenyan banks are in a state of disagreement over the CBK’s base lending rate, which directly affects Kenyans' access to loans.
The dispute seemingly stems from the CBK’s recent revelation of plans to move away from the Risk-Based Credit Pricing Model (RBCPM), five years after it was introduced. To that effect, banks had to submit their suggestions to the CBK review paper on the model, with a due date set for May 2.
According to CBK Governor Kamau Thugge, the reforms are meant to address ongoing challenges such as high lending rates and unclear pricing mechanisms through the creation of a market-driven framework for credit risk pricing.
The RBCPM was a joint initiative between the CBK and the banking sector, first introduced in 2019 as part of a broader strategy to address pertinent issues, including high lending rates and skewed loan pricing methods.
However, over the years, reviews have shown several shortcomings in the framework, including the fact that many banks failed to adopt the framework.
In addition, it was observed that some banks relied on pricing mechanisms that resulted in excessively high model-generated interest rates. CBK also observed that some banks introduced charges outside the RBCPM structure, raising the question of transparency.
Central to the proposed changes by the CBK is the adoption of the Central Bank Rate (CBR) as the standard benchmark for determining lending rates. Under this new model, banks will determine lending rates by adding a specific premium to the CBR. This premium is referred to as "K".
Further, CBK revealed that the proposed changes to the Risk-Based Credit Pricing Model (RBCPM) are aimed at boosting transparency and fairness in the credit market.
Consequently, CBK committed to publishing the components of each bank's “K” value, and the information would be made available online.
However, this has not gone down well with the banks. Through the Kenya Bankers Association, they have expressed that the reforms will only work if CBK incorporates liquidity injections or withdrawals as per market fluctuations.
The banks have advocated for using the interbank rate as the benchmark for lending rates, arguing that it better reflects market conditions. Banks have also expressed their preference to determine the "K" premium independently, without CBK oversight, to account for individual risk assessments and operational costs.
Bankers further argued that the shift towards CBR and the controlled margin “K” could amount to indirect interest rate capping.
The outcome of this debate holds significant implications for borrowers and the broader economy. If the CBK's proposals are implemented, borrowers may benefit from more transparent and potentially lower lending rates.
However, on the flip side, banks may face challenges in adjusting their pricing models and maintaining profitability.
