How Kenya’s New Risk-Based Credit Pricing Model Will Change Bank Loans
Key Take-aways from this Story
A Shift From CBR to Risk-Based Pricing
The Central Bank of Kenya (CBK) has formally adopted the revised risk-based credit pricing model as the reference point for determining interest rates on loans issued by commercial banks.
This marks a significant departure from the traditional Central Bank Rate (CBR), which was solely determined by the regulator and applied uniformly across commercial banks.
When the New Model Takes Effect
According to CBK Governor Kamau Thugge, the revised model will take effect on September 1, 2025, for all new variable-rate loans.
-Existing variable-rate loans will shift to the new system on February 28, 2026, following a six-month transition period.
Stakeholder Consultations
The regulator explained that the move follows a comprehensive consultation process initiated in April, engaging banks, industry associations, development partners, academia, consultancy firms, and individuals.
The feedback received was reviewed and factored into finalising the model, which CBK believes will enhance transparency and accountability in lending practices.
What the New Formula Looks Like
The revised model is anchored on the Kenya Shilling Overnight Interbank Average (KESONIA), aligning Kenya with international standards.
-New Lending Formula:
Lending Rate = KESONIA + Premium (K)-K covers lending costs, shareholder returns, and the borrower’s risk profile.
-KESONIA will apply to all variable-rate loans except fixed-rate and foreign currency loans.
-Where KESONIA is not practical, the CBR will remain an alternative benchmark.
Transparency Measures
To ensure openness, CBK has directed banks to publish their weighted average lending rates on both their official websites and the Total Cost of Credit (TCC) platform.
This move aims to empower borrowers with clear information on how their loan rates are determined, encouraging responsible borrowing and lending.
Implications for Borrowers and Banks
-Borrowers will now pay rates tailored to their risk profiles instead of blanket interest rates.
-Banks gain flexibility to align lending with risk management and profitability goals.
-The shift strengthens monetary policy transmission by linking credit pricing more closely to market forces.
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