Kenyans with poor credit history set to pay more for loans

As commercial banks prepare to transition to the new risk-based pricing model pegged on the Kenya Shilling Overnight Interbank Average (KESONIA), Kenyans with poor credit history could soon find it more costly to access credit from banks.

According to Central Bank of Kenya (CBK) Governor Kamau Thugge, though the new risk-based credit pricing model does not intend to leave anyone out of the formal financial market, high risk borrowers will have to contend with an elevated cost of credit compared to those with perceived to have a low risk of default.

In the next three months, commercial banks are expected to have transitioned to the new risk-based pricing models, with new loans expected to be priced using the new framework beginning December 1, 2025.

Unlike the previous RBCP framework, which was in place from 2019 and required approval from the Central Bank, the new framework will only require approval from individual banks' boards. An issue that could see interest in loans, disadvantage some segments of the population.

“If you are a very risky customer and you don’t pay your loan on time, it does not mean that you will be prevented from accessing credit, the credit will be there, but the price will be high and that will be reflected by what you are charged by the bank,” Thugge stated.

The Central Bank, pegging its hope for lower rates on the openness that will be brought by the new framework, hopes it will serve to push competitiveness in the banking sector and ensure Kenyans enjoy lower rates or move to banks that will offer credit at a lower premium “K” (which comprises of the banks operating costs related to lending, return to shareholders, and, the borrowers risk premium), having standardised the base rate for all banks. Unlike what was the case previously, where banks had different base rates, making it difficult for borrowers to determine the bank with better offers.

“Under the new framework we will be able to get the details of the K as the regulator and for the risk part we will be able to look and see if it makes sense from a qualitative point of view or a quantitative point so that it is also not used to raise as a way to just raise rates without really a foundation for raising the rate,” Thugge said.

To ensure compliance, banks will be required to report both their average lending rate and their average premium “K” monthly, with the regulator expressing optimism that the new framework will bare fruits, arguing that the previous framework was skewed to banks' advantage.

“We feel it was biased against borrowers in the sense that when rates would go up the commercial banks would immediately raise their rates, but when the time came to really stimulate the economy by lowering the rate we saw some reluctance on the part of the banks to lower their rates,” the CBK boss added.