Revised Risk-Based Credit Pricing Model: CBK’s New Loan Pricing Framework

Executive Summary

The Central Bank of Kenya (CBK) has introduced a Revised Risk-Based Credit Pricing Model (RBCPM) to enhance transparency and fairness in loan pricing. The model replaces the Central Bank Rate (CBR) as the benchmark with KESONIA (Kenya Shilling Overnight Interbank Average), aligning Kenya’s financial system with international standards like SONIA (UK) and SOFR (US). This change aims to strengthen monetary policy transmission, promote fair pricing and improve disclosure. While it does not guarantee lower interest rates, it introduces transparency and market responsiveness, requiring significant adjustments by commercial banks.

Background

The revision follows a consultative paper released on April 23, 2025, which attracted feedback from multiple stakeholders including the Kenya Bankers Association (KBA), commercial banks, IMF, EBRD and industry experts. The previous model, introduced in 2019, allowed banks to set their own base rates, but it lacked transparency, was biased toward banks and failed to adjust rates quickly to monetary policy changes.

Shortcomings of the Old Model

• Lack of clarity on how banks determined base rates.
• Delayed downward rate adjustments when CBK lowered benchmarks.
• Risk pricing was often segment-based instead of borrower-specific.

These issues prompted CBK to adopt a more market-driven and transparent approach.

Key Features of the Revised Model

The revised model introduces KESONIA as the primary reference rate for variable loans, alongside a structured premium (K) and full disclosure requirements.

a) Reference Rate: KESONIA

• Definition: Kenya Shilling Overnight Interbank Average, based on actual interbank transactions.
• Methodology: Compounded in arrears, providing daily and monthly benchmarks.
• Fallback: CBR will apply if KESONIA is unavailable.
• Application: All variable-rate loans (except FX and fixed-rate loans).

b) Premium (K) Components

The premium consists of:

• Operational Costs: Staff, depreciation, occupancy costs.
• Return on Equity: Expected return for shareholders.
• Borrower Risk Premium: Based on individual credit scoring.

The total lending rate = KESONIA + Premium (K) + applicable fees.

c) Fees and Charges

Includes origination, arrangement, commitment, late payment and default fees. All must be fully disclosed.

Disclosure and Transparency

To ensure customer protection and competition:

• Banks must publish weighted average lending rates, premium (K) and all fees.
• Updates must appear on:
  • Total Cost of Credit (TCC) website (revamped for usability and mobile).
  • CBK reporting platforms.
• TCC site will include loan comparison calculators and educational content.

Implementation Timeline

• New Loans: Effective Sept 1, 2025.
• Existing Loans: Transition ends Feb 28, 2026.
• Banks have three months to:
  • Develop internal pricing models.
  • Obtain board approval.
  • Submit models to CBK.

Implications for Stakeholders

For Borrowers

• Pros: Greater transparency, ability to compare loan costs and fair risk-based pricing.
• Cons: Interest rates will fluctuate more frequently, creating uncertainty for budgeting.

For Banks

• Significant IT system upgrades and process changes.
• Need for robust credit scoring models.
• Higher compliance and reporting obligations.

For the Market

• Alignment with global benchmarks like SONIA and SOFR.
• Enhanced monetary policy transmission.
• Likely increase in competition due to transparency.

What It Means for Interest Rates

The revised model is not designed to reduce rates, but to make pricing more transparent and market-driven. Borrowers with strong credit profiles may benefit from lower premiums, while higher-risk borrowers could face higher costs.

Comparison with Previous Models

Conclusion and Recommendations

The shift to KESONIA marks a major reform in Kenya’s credit market, promoting fairness and competitiveness. However, borrowers must prepare for rate volatility and banks must invest in technology and credit risk systems.

Recommendations

• Borrowers: Compare costs using the revamped TCC platform before taking loans.
• Banks: Develop advanced credit scoring systems and educate customers.
• Regulators: Monitor implementation closely to ensure compliance and consumer protection.