Banks push back against CBK’s new lending rate guidelines

The Central Bank of Kenya (CBK) is proposing major changes to how lending rates are determined in the country’s banking sector, sparking opposition from commercial banks.

The regulator has called for the Central Bank Rate (CBR) to be used as the common reference point for setting loan rates, moving away from the current practice of using the Interbank Rate.

CBK argues that the Interbank Rate, though a reflection of short-term market conditions, is too volatile and can result in unstable lending rates.

During periods of tight liquidity, the Interbank Rate fluctuates, which in turn leads to unpredictable loan pricing.

CBK believes that using the Central Bank Rate, which is more stable and reflective of the cost of funding for banks, would bring more consistency and transparency to the lending process.

"CBK proposes the use of the policy rate (Central Bank Rate) as the common reference rate for determining lending rates in the Kenyan banking sector," CBK explained in a recent statement.

"The Central Bank Rate (CBR), as the common reference rate, reflects the cost of funding to the banks."

However, commercial banks are pushing back against this change, arguing that the Interbank Rate better captures real-time market conditions.

They believe that continuing to use the Interbank Rate as the benchmark would enable borrowers to benefit more quickly from changes in the Central Bank’s policy decisions, especially after the introduction of interest rate caps on interbank lending.

In addition to the shift in reference rates, CBK’s proposal introduces a revised structure for determining the “K” premium, which will be added to the benchmark rate to calculate the final lending rate.

This premium will factor in a bank’s operating costs, the risk profile of the borrower, and the expected returns for shareholders.

Banks will be required to disclose the components of their lending rate premium, ensuring greater transparency in the process.

The goal is to create a more predictable and competitive environment for borrowers by making it easier to compare different loan products.

The Central Bank has also promised to monitor the implementation of these changes and ensure that banks adhere to the new rules.

Under the new system, the updated framework will take effect immediately for all new loans, with a transition period of three months for existing loans.