In a move that has sparked industry-wide debate, the Central Bank of Kenya (CBK) has firmly declined a proposal by the Kenya Bankers Association (KBA) to allow commercial banks to set their own lending premiums above a unified base rate pegged to the interbank rate. Finance analyst Chris Muiga, known for his sharp insights into regulatory policy and credit markets, calls the decision “a necessary guardrail” against the repeat of past market failures.
At the heart of the matter is how banks determine what they charge borrowers. KBA’s proposal would have introduced a system where a market-based base rate—derived from interbank activity—served as the common benchmark, while banks retained discretion to price in risk premiums as they see fit. According to Muiga, such an approach, while theoretically flexible, reopens doors to opacity and pricing unpredictability.
“We’ve been here before,” Muiga cautions. “The KBRR model allowed banks too much room to maneuver, and instead of fostering transparency, it became a tool for arbitrary rate adjustments. CBK is right to avoid repeating that mistake.”
Learning from KBRR: A Cautionary Tale
Chris Muiga points to the now-defunct Kenya Banks’ Reference Rate (KBRR)—a regime introduced in 2014 with the goal of harmonizing lending practices and improving clarity for borrowers. Initially welcomed as a reform, KBRR quickly unraveled as banks routinely loaded excessive risk premiums on top of the reference rate, rendering the base almost meaningless.
“The KBRR failed not because the base rate concept was flawed,” Muiga explains, “but because banks exploited the lack of regulatory oversight. The result was lending rates that barely changed and borrowers who remained confused and unprotected.”
CBK, seemingly informed by this historical misstep, is now proposing an alternative structure. Under the revised framework, the Central Bank Rate (CBR) would serve as the unified base. Importantly, all risk premiums would be:
- Submitted to CBK for review, and
- Publicly disclosed to promote accountability.
This marks a significant shift toward regulatory visibility and borrower empowerment, a direction Muiga fully supports.
Why CBR and Not the Interbank Rate?
One of the most contested aspects of the KBA proposal was the use of the interbank rate—a highly responsive indicator tied to short-term liquidity flows—rather than the CBR, which is more stable and policy-driven. Chris Muiga argues that while the interbank rate reflects immediate market dynamics, it is too volatile and susceptible to manipulation or misalignment with broader macroeconomic conditions.
“The interbank rate is like a thermometer,” Muiga analogizes. “It tells you the current temperature of liquidity, but not the climate. CBR, by contrast, reflects the monetary policy environment and is better suited to anchor long-term credit pricing.”
The Broader Implications for Kenya’s Credit Market
Muiga believes CBK’s rejection of the KBA proposal should be seen as part of a larger institutional effort to bring discipline and fairness to Kenya’s financial ecosystem. With credit access still uneven and interest rate spreads among the highest in the region, establishing a transparent, predictable pricing framework is crucial.
“The banking sector must remember that credit is not just a product—it’s a public good. When pricing is hidden or erratic, trust erodes. That’s bad for borrowers, but also bad for the long-term health of the financial system,” he says.
CBK’s approach also aligns with global trends toward enhanced financial consumer protection, where regulators are increasingly demanding clear disclosures and justification for risk pricing.
A Turning Point or Another Stalemate?
As discussions between the banking sector and the regulator continue, Chris Muiga sees an opportunity for constructive alignment, not confrontation.
“Banks need to be agile, yes, but not at the expense of transparency. If they want to be trusted, they must be willing to subject their premiums to scrutiny. That’s how mature markets work.”
In his closing thoughts, Muiga frames the moment as a pivotal point for Kenya’s financial future—one that will determine whether the country can build a credit environment that is both efficient and equitable.
“It’s not about controlling banks. It’s about creating a system where both lenders and borrowers thrive through clarity, fairness, and shared accountability.”