Banks accuse CBK of attempting to cap crediting

The Kenya Bankers Association, the umbrella body for all commercial banks, has warned of lower credit extension to the private sector should the Central Bank of Kenya insist on its proposed risk-based credit pricing model, which they say risks stifling access to credit for vulnerable enterprises.

The bankers have further described the proposal from the regulator as a reintroduction of regulatory control over lending rates.

According to the lenders, the CBK proposal — which has the Central Bank Rate as the base lending rate — also proposes to introduce a risk premium “K,” comprising the bank’s operating cost of lending, return to shareholders, and the borrower’s risk premium, which shall be reviewed by the CBK. An issue that the lenders' body now says is equivalent to an indirect interest rate cap.

This, they say, will result in a reduction in lending to Kenyans and businesses, especially MSMEs, as experienced between 2016 and 2019 when the interest rate capping law was in place.

"Banks go to CBK for both approval — the approval of the base — and the oral conversation was that the whole conversation doesn’t go past this. So that’s the challenge we have within the market. There’s a control that is verbal, and being a regulator, as an individual bank, you can’t do anything. That’s the direction. So, for us, for all intents and purposes, the way the proposal has been made — that’s interest rate capping, which will not be known to the public. And unfortunately, that capping will be worse than what we were in during 2016–2019,” said KBA CEO Raimond Molenje.

The Bankers Association also argues that a flexible and transparent model, where premiums reflect differentiated borrower risk and prevailing market conditions, is consistent with Kenya's liberalised interest rate regime. They add that disregarding the interbank market weakens monetary policy effectiveness and misaligns market outcomes.

Bankers argue that a formula alone can’t lower the cost of credit, and that more attention should be paid to the fundamentals.

"Each and every bank tried to come up with a format that would work. Still, even presently, the formats that were approved by the Central Bank are not being applied by banks. Because if banks apply the current risk-based pricing framework, the interest rates will go up, even when the CBR comes down. That’s the trouble we are in currently. That’s why we are saying this risk-based framework is not working,” Molenje added.

As the push and pull between banks and their regulator continues, it is the consumers who will bear the cost, either through expensive credit or the inability to access credit, even as they wait for a lasting solution.