CBK issues revised risk-based credit pricing model

The Central Bank of Kenya has yielded to pressure from financial institutions to have the interbank rate as the operating rate for loans, formally adopting the revised risk-based credit pricing model, which will now be anchored on the overnight interbank average rate.

It will now be renamed the Kenya Shilling Overnight Interbank Average (KSOIA), to align with international best practice, dropping the use of the bi-monthly Central Bank Rate.

According to the CBK, going forward, banks will be required to compute the total cost of credit by incorporating the Kenya Shilling Overnight Interbank Average (KESONIA), plus premium (K)—which reflects the creditworthiness (risk) of the customer—together with the fees and charges imposed by the bank.

The move has been welcomed by the banks' umbrella body, noting that it will be key in ensuring faster translation of monetary decisions and enhancing transparency in the credit market.

“Customers are always asking banks: My interest rate is at 17, how does it come to 17? So this is also going to be very clear, because this common reference rate, KESONIA, will be known to everybody. You can check the Central Bank website to see where KESONIA is, and it will be across all banks,” said Kenya Bankers Association CEO Raimond Molenje.

“Now we have a risk premium for individual customers—are you a low-risk customer or a high-risk customer? If you’re a low-risk customer, you will have your final interest rate a little bit lower.”

To ensure that no customer is left behind in the credit market, the Central Bank has further approved a credit information sharing mechanism that will see banks consolidate customer credit information in one portal for credit agencies to assign a score, reducing conflicting credit information and rating disparities.

“We are happy to reveal that two weeks ago Central Bank was able to approve a product that we have been championing through CIS Kenya. When banks send data to the credit bureaus, it ought to be through one portal where these three bureaus can pick this information. With that, we will not have a scenario where these bureaus get different information from banks,” stated Molenje.

The bankers further argue that the revised risk-based credit pricing model is not meant to raise borrowing costs arbitrarily, allaying fears that those with lower credit risk might face discrimination. They note that all banks will now post their rates on the Central Bank website, allowing customers to decide what suits them.

“Your risk profile may be at a high level where one bank is saying no, but you should not stop there. What you need to do is find information on banks that are interested in the area you are playing in, and you will actually be accommodated,” said Molenje.

Although the CBK has noted that the revised model will take effect from September 1, 2025, for all new variable rate loans, the bankers argue that this is not enough time to have their models approved by their respective boards—a process, they say, could take at least three months. They have written to the CBK for further clarification.

As banks prepare for the implementation of the new risk-based pricing model, customers have been urged to work on their credit history to be eligible for lower rates.