The Central Bank of Kenya (CBK) has proposed an overhaul of the country’s credit pricing framework, recommending that all banks base their lending rates on the Central Bank Rate (CBR). This will potentially bring an end to the Risk-Based Credit Pricing Model (RBCPM), which has faced serious implementation hurdles since its adoption in 2019.
Why CBK Wants to Replace RBCPM
According to CBK, the RBCPM has failed to deliver on its promise of transparency and fair lending. Instead of setting interest rates based on individual borrower risk profiles, many banks lumped customers into broad segments, often adding hidden charges such as penalty interest and processing fees. This led to unrealistic loan rates, weak oversight, and widespread consumer dissatisfaction.
The new proposal seeks to introduce a transparent, uniform credit pricing model where banks will calculate interest rates by adding a CBK-approved premium to the CBR. This premium will include operating costs, risk margins, and expected returns. These rates will also be publicly disclosed on both the CBK website and in national newspapers.
Key Flaws in the Current Credit Pricing Model
A CBK review of the existing risk-based framework revealed several critical issues:
- Models often produced excessively high interest rates, forcing banks to apply discretionary discounts.
- Some loan types, including mobile loans and government-backed credit, were excluded from the model.
- Outdated variables and infrequent model updates rendered pricing inaccurate.
- Risk assessment was generalized, with borrowers grouped rather than individually assessed.
- Governance and board oversight of pricing decisions were found to be inadequate.
- High cost of funds, especially from term deposits, kept rates elevated even when the CBR was reduced.
Read: Banks Face Daily Fines from June for Failing to Lower Lending Rates, CBK Says
Benchmarking Against Global Standards
CBK’s move is inspired by credit pricing frameworks in countries such as the United States, United Kingdom, India, Brazil, and South Africa, where policy rates serve as the base for lending. These countries apply well-defined risk premiums on top of a central rate, ensuring consistency, predictability, and policy alignment, outcomes the CBK hopes to achieve locally.
KBA’s Competing Proposal and CBK’s Response
In response to CBK’s push, the Kenya Bankers Association (KBA) has submitted its own proposal to adopt a Kenya Base Rate (KBR), which would be tied to the interbank rate. Under this model, banks would independently set premiums without CBK approval. However, the CBK expressed reservations, noting that a similar approach under the former Kenya Bankers Reference Rate (KBRR) resulted in pricing disparities and limited consumer protection.
Public Feedback and Implementation Timeline
The CBK is inviting public feedback on the CBR-based model until May 2, 2025. If adopted, the new framework will apply to all loan types, with a three-month transition period for existing credit facilities.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.