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Bank CEOs step up push for loan rate formula review
Kenya Bankers Association Chairman John Gachora speaks during the Launch of the Chora Plan financial literacy campaign on June 11, 2024 at the Serena Hotel in Nairobi.
The chief executive officers of commercial banks have stepped up the push for the review of the loan pricing framework, calling for the creation of a single industry benchmark to cut loan costs as borrowers fail to feel the relief of falling domestic rates.
The push to review the risk-based loan pricing framework comes as the lenders reveal talks with the Central Bank of Kenya (CBK) to overhaul their models to come up with a common base lending rate amid concerns from borrowers over sticky interest rates.
The risk-based pricing framework, introduced through the 2019 banking charter, has seen banks price loans based on customer risk profiles, including all positive or negative information from credit reference bureaus (CRBs).
Kenya Bankers Association (KBA) Chairperson and NCBA Managing Director John Gachora says borrowers have failed to earn relief from falling interest rates as lenders set different benchmarks under the current pricing model.
“What is clear is that risk-based pricing needs a little bit of streamlining to remove some of the concerns. Banks have done a lot of work to reduce interest rates, but it is not very visible because each of us has a different rate,” he said.
“Harmonising the rates is important both to us and to the CBK.”
Banks admit that borrowers are yet to feel the impact of interest rate cuts despite industry-wide announcements as the different internal benchmarks mask the overall weight of reduction.
Each bank has a different internal benchmark rate to the other which distorts the industry’s average lending rate.
Standard Chartered Bank Kenya Chief Executive Kariuki Ngari said the industry needs to identify a solution that would make changes in loan rates to closely track movements in the CBK policy rate.
“Last year, interest rates were only moving in one direction which was up, now interest rates are coming down, we have to go back to the model and see whether the adjustment is as fast as that of the CBR and what needs to be done if it isn’t the case,” he said.
Average commercial bank lending rates have barely moved since August when CBK rate cuts commenced with the loan costs slowing to only 16.41 percent as of February 2025 from 16.84 percent in August.
In contrast, the Central Bank Rate has fallen by over two percentage points over the same period, dropping from 13 percent at the start of August last year to 10.75 percent at present.
While most bank CEOs want an overhaul of the risk-pricing model, KCB Group chief executive Paul Russo said the importance of pricing customers by their risk profile should be retained in the review.
“One of the items that I believe we agree on is we should not lose the benefit of risk-based pricing, which is about transparency of rates to our customers,” he said.
The push for the overhaul of risk-based pricing comes on the backdrop of CBK’s pressure on commercial banks to cut interest rates in tandem with its benchmark policy rate.
