Kenya’s commercial banks are set to adopt a new risk-based credit pricing model tied to the Kenya Shilling Overnight Interbank Average (KESONIA), a move that could make borrowing more expensive for individuals with poor credit histories while aiming to foster greater competition and lower overall interest rates.
Announced by Central Bank of Kenya (CBK) Governor Kamau Thugge, the framework is designed to ensure that all Kenyans remain included in the formal financial system, but with pricing reflective of individual risk levels. The transition is expected to be completed within the next three months, with new loans priced under the model starting December 1, 2025.
This shift comes as part of broader efforts to address inefficiencies in the lending market, where previous systems were criticized for lacking transparency and favoring banks over borrowers.
Under the new model, banks will peg loan interest rates to KESONIA as a standardized base rate, adding a premium known as “K.” This premium encompasses the bank’s operating costs for lending, returns to shareholders, and a borrower-specific risk factor.
Unlike the prior risk-based credit pricing (RBCP) framework introduced in 2019, which required CBK approval for rate changes, the new system empowers individual banks’ boards to set their own premiums without central oversight for each adjustment.
Governor Thugge emphasized that the change does not aim to exclude high-risk borrowers.
“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,” he said. “The credit will be there, but the price will be high and that will be reflected by what you are charged by the bank.”
The CBK anticipates that standardizing the base rate across all banks will enhance transparency, allowing borrowers to more easily compare offers and switch to lenders with lower “K” premiums. Previously, varying base rates among banks made it challenging for consumers to identify the most competitive deals.
“We hope 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’,” Thugge explained.
He added that the regulator will monitor the risk component of “K” to prevent unjustified rate hikes, reviewing it qualitatively and quantitatively.
“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… so that it is also not used to raise as a way to just raise rates without really a foundation for raising the rate.”
To enforce accountability, banks must report their average lending rates and average “K” premiums to the CBK on a monthly basis. This reporting requirement is intended to promote openness and prevent abuses.
The previous RBCP framework, while innovative at the time, faced criticism for its perceived bias toward financial institutions. Thugge noted that banks were quick to increase rates when market conditions worsened but reluctant to lower them during economic stimulus periods.
“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,” he said.
This reluctance, according to the governor, hindered efforts to boost credit access and economic growth, particularly in a country where access to affordable financing is crucial for small businesses and households.
The introduction of the new model follows recent concessions by the CBK to banks on risk-based pricing, amid ongoing discussions about balancing regulatory oversight with market freedom. It also occurs against a backdrop of economic challenges in Kenya, including a decline in the number of dollar millionaires— with around 400 wealthy individuals falling off the list in recent reports—and ambitious fundraising efforts by entities like Kenya Airways, which seeks at least 64.5 billion Kenyan shillings (approximately $500 million) to expand its fleet.
Experts suggest the framework could democratize lending by rewarding responsible borrowers with lower rates, potentially encouraging better credit behavior across the population. However, concerns remain about its impact on vulnerable groups, such as low-income earners or those in informal sectors with limited credit histories.
Financial analyst Jane Mwangi, from Nairobi-based think tank Economic Policy Institute, welcomed the move but cautioned about potential disparities.
“While standardization is a step forward, the devil is in the details of how banks assess risk,” she said. “Without robust data on borrowers, segments like rural farmers or young entrepreneurs might be unfairly penalized.”
The CBK remains optimistic, arguing that increased competition will drive down average rates over time. Data from the regulator shows that Kenya’s average lending rate stood at around 13% in mid-2025, with hopes that the new system could reduce this by promoting efficiency.
Looking ahead, the success of the framework will depend on effective implementation and monitoring. Borrowers are advised to monitor their credit scores through agencies like the Credit Reference Bureau, as these will play a pivotal role in determining loan costs.
As Kenya navigates this transition, the model could serve as a blueprint for other African nations grappling with similar issues in financial inclusion and market competitiveness. Stakeholders will be watching closely to see if it delivers on its promise of lower rates without exacerbating inequalities.
In the meantime, the CBK encourages consumers to shop around for loans, leveraging the newfound transparency to secure better terms.
