CBK ADOPTS NEW RISK-BASED CREDIT PRICING MODEL FOR BANK LOANS

The Central Bank of Kenya (CBK) has adopted a revised risk-based credit pricing model that will now guide the interest rates charged on bank loans.

The shift moves away from the long-standing Central Bank Rate (CBR), which previously acted as the sole benchmark for lending rates in the country.

CBK Governor Kamau Thugge said the new model would apply beginning September 1, 2025.

“All new variable-rate loans will now be priced under the revised risk-based credit pricing model,” Thugge announced in a statement on Tuesday, August 26.

Existing variable-rate loans will transition to the new system after a six-month grace period, with full implementation expected on February 28, 2026.

The model is anchored on the Kenya Shilling Overnight Interbank Average (KESONIA), which replaces the overnight interbank average rate. According to the CBK, this change aligns Kenya with international best practices.

Under the new framework, commercial banks will calculate lending rates as KESONIA plus a premium (“K”), covering lending costs, shareholder returns, and the borrower’s risk profile.

“KESONIA will apply to all variable-rate loans except for foreign currency-denominated loans and fixed-rate loans. Where it is not practical, customers may use the CBR as an alternative reference,” CBK noted.

The regulator stressed that the adjustments were designed to improve monetary policy transmission and enhance transparency in the credit market.

CBK said the decision followed extensive consultations with banks, industry associations, development partners, non-bank financial institutions, academia, and individuals.

“These comments were duly reviewed and considered in finalising the revised risk-based credit pricing model,” the statement read.

To boost accountability, commercial banks will be required to publish their weighted average lending rates on both their official websites and the Total Cost of Credit (TCC) portal.

CBK maintained that the new approach would promote responsible lending by ensuring that loan pricing accurately reflects the risk profile of each borrower.