A policy tug of war has deepened between the Central Bank of Kenya (CBK) and commercial banks after the regulator rejected claims by the lenders that it is seeking to reintroduce price controls.

In a strongly worded statement issued yesterday, the banking sector regulator clarified that a consultative paper released in April 2025 does not propose a return to interest rate caps, countering claims made by the Kenya Bankers Association (KBA), the industry’s umbrella body.

“Arising out of the public consultation process and as it reviews the responses, CBK wishes to make the following two clarifications. First, the Paper does not propose the re-introduction 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 central bank stated.

The clarification comes after heightened industry anxiety that  CBK may be seeking tighter control over the lending environment—an area that has long been contentious between regulators and banks in Kenya.

At the heart of the matter is the central bank’s longstanding concern over the lack of transparency and effective disclosure by commercial banks—issues that have contributed significantly to high lending rates in the country.

According to CBK, limited public access to clear and comparable credit information has prevented consumers from making informed borrowing decisions, effectively stifling financial inclusion. To address this, the CBK previously introduced Kenya Bankers Reference Rate (KBRR), which was calculated as the average of the Central Bank Rate (CBR) and the two-month weighted moving average of the 91-day Treasury Bill rate.  Lending institutions were required to price their flexible rate loans as KBRR plus a premium (“K”)—meant to reflect the specific risk and operational cost associated with each loan.

Regulatory approval

However, under the latest proposal, CBK seeks to make the CBR the sole base rate, while requiring regulatory approval for the “K” premium charged by banks. It is this shift that has alarmed the KBA, which argues that such a move amounts to indirect interest rate capping.

In its response, the Kenya Bankers Association has accused the regulator of overreach, arguing that requiring prior approval for lending premiums would stifle the ability of banks to price risk effectively. “While the CBK paper does not explicitly call it a cap, subjecting the lending margin ‘K’ to regulatory scrutiny and mandating the CBR as the only benchmark base rate effectively amounts to an interest rate control mechanism,” the KBA stated.

The association emphasised that market-determined lending rates are essential to promote financial sector growth and ensure the health of the banking system, warning that restrictive measures could lead to reduced credit access, especially for higher-risk borrowers and small businesses.

The current debate revives memories of the controversial interest rate cap that was introduced in August 2016 through an amendment to the Banking Act.

The cap restricted lending rates to no more than 4 per cent above the CBR and set a floor on deposit rates at 70 per cent of the CBR. It was a response to public outcry over the high cost of borrowing, which had priced out a large segment of the population.

While well-intentioned, the cap had far-reaching consequences. It led to a decline in monetary policy effectiveness and significantly reduced credit access, particularly from smaller banks that struggled to lend profitably within the capped margins.