CBK rejects banks' rate cap claims, digs in on Ruto's loan reforms

CBK Governor Dr Kamau Thugge before the National Assembly's Committee on Finance and National Planning on March 25, 2025. [Elvis Ogina, Standard]

The Central Bank of Kenya (CBK) has dismissed commercial lenders' claims that its proposed loan pricing reforms amount to a return to "interest rate capping," escalating a deepening rift over President William Ruto's push for cheaper credit.

Governor Kamau Thugge, in a robust response to the Kenya Bankers Association (KBA), reiterated the regulator's commitment to a "transparent and efficient credit market," while rejecting the banks' concerns as unfounded.

At the heart of the dispute lies the CBK's proposal to anchor loan pricing on the benchmark Central Bank Rate (CBR), the interest rate at which the CBK lends to commercial banks.

Banks vehemently oppose this, arguing it constitutes regulatory overreach.

In a recent consultative paper on the Risk-Based Credit Pricing Model (RBCPM), a framework for determining loan interest rates based on borrower risk, the CBK outlined a plan to use the CBR as the base reference rate, with banks adding a premium ("K") to account for their operating costs and borrower risk.

The CBK's intention to review this premium has sparked outrage among lenders, who perceive it as a form of price control.

However, the CBK, in a direct rejoinder, maintained that the consultative paper "does not propose the re-introduction of interest rate caps."

The regulator also asserted it will not abandon its monetary policy framework, anchored on the interbank rate, the interest rate charged on short-term loans between banks, as alleged by the KBA.

Instead, it emphasised its commitment to enhancing market stability, citing recent adjustments to the interest rate corridor, the range within which the interbank rate fluctuates around the CBR, and discount window rates, the interest rate charged by the CBK for emergency loans to banks.

Central Bank of Kenya Governor Dr Kamau Thugge. [File, Standard]

Governor Thugge's firm stance underscores the CBK's determination to implement President Ruto's loan reform plan, which prioritizes affordable credit for Kenyan borrowers.

Ruto has publicly criticised banks for maintaining high lending rates, pointing to the success of the state-backed Hustler Fund as evidence that lower rates are viable.

The Kenya Bankers Association (KBA), the lobby group representing commercial banks in Kenya, had argued that the proposed reforms would stifle lending, particularly to Micro, Small, and Medium-sized Enterprises (MSMEs), small businesses crucial to the Kenyan economy, and impede the CBK's monetary policy transmission mechanism.

They advocated for the interbank rate as the base reference rate, pushing for a market-driven approach.

The CBK, however, countered that the interbank market is prone to volatility, a claim the KBA rejects, arguing it is the central bank's responsibility to manage market liquidity.

"First, the Paper does not propose the reintroduction of interest rate caps. Second, it does not indicate that CBK will cease its monetary policy implementation framework anchored on the interbank rate as the operational target," the CBK stated.

"CBK continues to enhance the effectiveness of the monetary policy implementation framework."

The regulator's dismissal of the KBA's concerns signals a hardening of positions, with the CBK indicating a clear intent to push forward with its reforms, despite the industry's strong opposition.

"The Paper elicited over 40 responses from a diverse range of individuals, commercial banks, non-bank financial institutions, industry associations, international financial institutions, consultancy firms, academia, and corporate firms," the CBK said. "CBK appreciates the responses and will take them into consideration."