CBK emphasise adoption of standard lending rate by banks to promote affordable financing

The Central Bank of Kenya will be assessing the Risk-Based Credit Pricing Model (RBCPM) to evaluate if it has met the needs of the evolving banking sector five years after its introduction.

In a statement today, CBK proposes the adoption of the Central Bank Rate (CBR) as the standard benchmark for banks to determine lending rates by adding a specific premium to CBR.

CBK revealed that the proposed changes to the RBCPM are a way to boost transparency and fairness in the credit market.

The monetary Authority has committed to publishing the components of each bank’s “K” value, and the information will be available online.

“CBK will publish the components of each bank’s lending rate premium (“K”) on its website, the Total Cost of Credit (TCC) website, and in two newspapers of nationwide circulation,” they said in the statement today.

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.

Central to the proposed changes by the CBK is the adoption of the Central Bank Rate (CBR) as the standard benchmark for determining lending rates.

Under this new model, banks will determine lending rates by adding a specific premium to the CBR. This premium is referred to as “K”.

RBCPM framework was adopted primarily to assess the likelihood of a borrower to repay a loan so that banks can price the credit accordingly, instead of having one uniform interest rate.

However, over the years, reviews have shown several shortcomings in the framework, including the fact that many banks failed to adopt the framework. CBK observed that some banks relied on pricing mechanisms that resulted in excessively high model-generated interest rates.

They also observed that some banks introduced charges outside the RBCPM structure, raising the question of transparency.
Further, many banks used the average cost of deposits over six to twelve months to determine the cost of funds.

This practice was detrimental as it meant that loan pricing did not quickly reflect reductions in the CBR. A consultative paper has since been released by the monetary authority, inviting the public and stakeholders to give feedback on the proposed changes.