The Central Bank of Kenya (CBK) has reverted to using the interbank rate as the main reference point for pricing bank loans, abandoning its earlier plan to anchor lending rates on the Central Bank Rate (CBR).
In a notice to commercial banks, CBK stated that going forward, loan interest rates will be determined using a new formula, using the Interbank Rate + Premium (K) issued. The move marks a return to a more market-driven pricing model that reflects real-time liquidity conditions among banks.
CBK explained that the interbank rate closely tracks the CBR under current monetary policy operations and is better suited for flexible and transparent pricing.
According to CBK, when using the interbank rate is not feasible, banks may still use the CBR as an alternative benchmark.
All banks have been given three months to develop risk-based credit pricing models, have them approved by their boards, and submit the documents to CBK within 15 days of board approval.
CBK will then assess the submitted models as part of its ongoing regulatory oversight.
The new model will apply to all loans denominated in Kenyan shillings, excluding foreign currency loans that are influenced by external factors like currency volatility.
During the three-month transition, banks must publish their lending rates, all related charges, and the weighted average premium (K) on the Total Cost of Credit website to boost pricing transparency.
The changes are part of CBK’s effort to make lending more responsive to market dynamics while ensuring consumers are better informed about the cost of borrowing.
On April 23, CBK revealed plans to move away from the Risk-Based Credit Pricing Model (RBCPM), five years after it was introduced.
In a statement, the lender of last resort said it was time to assess the model to see whether it still met the needs of the evolving banking sector landscape, five years on.
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.
Over the past five years, the model has been integral in the banking sector, serving as a market-based framework to guide how banks price credit risk for their clients seeking loans.
In the new changes, the borrowers may face less predictable loan rates. According to the latest model, when liquidity is tight, rates could rise quickly, making loans more expensive for ordinary Kenyans.
On the other hand, Kenyans with strong credit histories could get better deals, but those deemed ‘risky’ could face much higher rates, potentially pushing more people to mobile lending apps.
