Why wait for cheaper loans is taking long

Only one of Kenya’s 38 commercial banks has so far sought regulatory approval for a new, transparent loan pricing model, the Central Bank of Kenya (CBK) Governor Kamau Thugge revealed on Wednesday. 

The slow uptake deals a blow to a flagship reform championed by the banking regulator, intended to make lending rates more responsive to monetary policy. 

The delay highlights the resistance Dr Thugge faces in overhauling a decades-old system long criticised for its opacity and for allowing lenders to lag in passing on rate cuts to borrowers. 

The revelation by the CBK boss came just a day after the Thugge-led Monetary Policy Committee (MPC) cut its benchmark interest rate by 25 basis points to 9.25 per cent, its eighth reduction in a cycle that began last year.  

Despite these aggressive cuts, average commercial bank lending rates remained stubbornly high at 15.1 per cent as of September, stifling credit growth to the private sector. 

Governor Thugge yesterday pleaded with the country's cash-rich and powerful banks to swiftly adopt the new framework, which took effect last month.  

He expressed frustration that lenders have been quick to raise borrowing costs when the CBK hikes its benchmark rate, but slow to lower them when the policy rate is cut. 

“We do have one bank that has already submitted to us,” Thugge told journalists during a post-MPC briefing.

He did not name the lender. “We have given the banks three months for the new loans and six months for the existing loans.” 

For consumers, the low adoption rate means a delay in the promised benefits of the new system.  

It means Kenyans will likely have to wait longer to see their loan costs fall immediately after a CBK rate cut, and the transparency the model promises in breaking down interest costs remains elusive for most borrowers.  

The slow progress also means the apex bank is immediately confronted with the very legacy and headaches of policy transmission that the new loan pricing system was specifically designed to solve. 

The governor reckons the new model, which pegs loans to the daily Kenya Shilling Overnight Interbank Average (Kesonia) rate plus a bank-specific premium, will end this asymmetry. 

“I think the banks were quick to raise rates when the CBR went up, but were not as quick to lower their lending rate when the CBR came down,” Thugge said.

“This new framework … will automatically imply that every time we lower the policy rate… that immediately, the customers from the banks will experience an immediate reduction in their interest rate. That is the intention of this new policy framework.” 

The reform, known as the revised Risk-Based Credit Pricing Model (RBCPM), is designed to strengthen the transmission of monetary policy.  

For years, borrowers have complained that the benefits of the CBK’s rate-cutting cycle have not been fully passed on, a point of tension between the sector and its regulator. 

The new system mandates that banks publicly disclose their average lending rates, premiums, and all fees, providing borrowers with a clearer picture of the total cost of credit. 

Despite the slow start, Thugge urged banks to see the commercial advantage in being early adopters. He suggested that customers would gravitate towards banks offering greater transparency. 

“To the advantage of the fast movers, those banks that move quickly to adopt this new framework, I think customers will be interested in that transparency,” he said.

“I do believe that for banks that are moving quickly in that direction, it is actually positive for them, even from a business point of view.” 

The CBK has given banks a three-month deadline to get their new pricing models approved for new loans, and until March 2026 to migrate all existing variable-rate loans.

The single submission to date indicates the banking industry is proceeding with caution, posing a significant challenge to one of Governor Thugge's key policy initiatives.