Kenya Bankers Association Welcomes CBK’s New Risk-Based Loan Pricing Model

The Kenya Bankers Association (KBA) has backed the Central Bank of Kenya’s new risk-based approach to credit pricing, which will provide a new benchmark for interest rates to be charged on commercial bank loans. The endorsement marks a significant shift in Kenya’s financial sector, promising greater transparency, improved monetary policy transmission, and enhanced access to credit for previously underserved populations.

In a statement released on Wednesday, September 3, the Association emphasized that the reforms will open up access to bank credit for individuals and enterprises, enhancing the sector’s ability to support Kenya’s economic growth. The new framework represents the culmination of months of consultation between regulators, financial institutions, and industry stakeholders aimed at addressing persistent challenges in credit access and pricing transparency.

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Revolutionary KESONIA Benchmark System

Among the most significant aspects of the new framework is the introduction of the Kenya Shilling Overnight Interbank Average (KESONIA) as the benchmark base rate for all variable-interest loans. The Association affirmed that KESONIA, which takes its basis from the rate at which banks lend to each other overnight, provides a market-determined benchmark that brings Kenya in line with international best practice.

CBK Governor Kamau Thugge explained that customers with low-risk profiles could access loans at rates even lower than the KESONIA rate. “In other words, if you have a very good customer and not much risk, maybe even their loan is backed by deposits in your bank, you can decide to say your loan will be KESONIA minus one or minus two. If he’s a very high risky person, it would be KESONIA plus three or plus four,” the CBK governor explained.

Under this innovative system, banks will set variable-interest rates by combining the KESONIA base rate with a premium that reflects each borrower’s risk profile, operating costs, and required returns. This approach aligns Kenya with global standards similar to SONIA in the UK and SOFR in the US, representing a fundamental shift from the previous Central Bank Rate (CBR) based system.

Enhanced Transparency and Borrower Empowerment

The KBA emphasized that the new model will promote unprecedented transparency by forcing banks to disclose all the elements that constitute interest rates. By making these factors transparent, the bankers explained, borrowers will have a complete picture of the actual cost of loans before committing to credit facilities.

Banks will be required to publish their weighted average lending rates, average premiums, and applicable fees for each product on both their websites and the CBK’s Total Cost of Credit (TCC) platform. This comprehensive disclosure requirement aims to end opaque pricing practices that have historically disadvantaged borrowers and limited competition among lenders.

The association noted that the revised model will integrate a borrower’s credit history more directly into loan pricing, making repayment behavior a central factor in determining interest charges. This risk-based approach rewards creditworthy borrowers with lower rates while ensuring that lending institutions can appropriately price risk across their portfolios.

Kenya Bankers Association CEO Raimond Molenje emphasized the common reference point benefit: “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. 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.”

Expanding Credit Access for Underserved Groups

The banking industry stated that “this shift is expected to significantly expand access to credit for previously underserved groups, including MSMEs, youth, persons with disabilities, and women-led enterprises.” This expansion addresses critical gaps in Kenya’s financial inclusion landscape, where these demographic groups have historically faced barriers to formal credit access.

Kenya’s 7.4 million MSMEs contribute approximately 40% to the country’s GDP and employ nearly 14.9 million people, yet many struggle to access formal financing due to perceived risk and lack of traditional collateral. The new pricing model’s focus on individual risk assessment rather than broad categorizations should particularly benefit creditworthy enterprises in these sectors.

Research shows that only 32 percent of women-owned MSMEs can access formal credit in Kenya, highlighting the significance of reforms designed to improve access for women-led enterprises. The government has already established various support mechanisms, including the Women Enterprise Development Fund, Youth Enterprise Fund, and Uwezo Fund, which aim to unlock access to affordable credit at the grassroots level.

The Uwezo Fund, established in 2013, specifically targets youth, women, and persons with disabilities by providing access to interest-free loans to help them start or grow businesses. The new risk-based pricing model should complement these existing programs by making commercial bank credit more accessible and fairly priced.

Monetary Policy Transmission Enhancement

A key driver behind the CBK’s reform initiative has been the need to strengthen monetary policy transmission, which has historically been weak in Kenya. Changes in the central bank rate have not always been effectively reflected in the broader economy, creating challenges for monetary policy implementation.

The Central Bank Rate currently stands at 9.50 percent following the latest adjustment by the Monetary Policy Committee in August 2025. The new KESONIA-based system should ensure that future monetary policy decisions are more quickly and accurately transmitted to commercial lending rates, enhancing the central bank’s ability to influence economic conditions.

This improved transmission mechanism becomes particularly important as Kenya seeks to balance economic growth objectives with price stability. The CBK’s decision to overhaul the credit pricing structure was partly motivated by frustrations over the banking sector’s reluctance to reduce interest rates despite multiple cuts to the benchmark lending rate since October 2024.

Implementation Timeline and Industry Commitment

The transition to the new model will take place over six months, from September 1 to November 30, 2025, during which banks are required to review and update their loan pricing models and secure board approval. New loans will adopt the KESONIA-based formula once approved by individual bank boards, while existing variable-rate loans will transition to the new system by February 28, 2026.

Banks have expressed concerns that the September 1 implementation timeline may not provide sufficient time to have their models approved by their respective boards—a process they indicate could take at least three months. The industry has written to the CBK seeking clarification on this timeline challenge.

“Bankers recognise the important regulatory role CBK has played in guiding the sector to enhance transparency, strengthen customer centricity, ensure ethical banking practices, and roll out the revised risk-based pricing of credit,” the Association noted. The banking industry has committed to fully support implementation, viewing it not merely as a compliance requirement but as an enabler of expanded credit access.

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Addressing Historical Regulatory Friction

The reform follows months of friction between CBK and commercial banks. When the plan was initially floated in April 2025, lenders pushed back, warning that prescriptive rules could distort the market. The Kenya Bankers Association argued then that the approach could restrict how banks assess risk.

The consultation period announced on April 23, 2025 allowed for extensive feedback from banks, development partners, industry associations, non-bank financiers, and other stakeholders. The final framework incorporates recommendations from multiple parties, including banks, academia, and consultancy firms, representing a collaborative approach to regulatory reform.

The adoption of KESONIA appears to be the regulator’s response to industry criticism. By tying credit pricing to a transaction-based benchmark while allowing banks to retain room for setting borrower-specific premiums, the CBK has addressed concerns about market distortion while achieving its transparency and monetary policy transmission objectives.

Credit Information Sharing and Risk Assessment Improvements

To support the new risk-based pricing model, the Central Bank has approved a credit information sharing mechanism that will see banks consolidate customer credit information in one portal for credit agencies to assign scores. This development should reduce conflicting credit information and rating disparities that have historically complicated lending decisions.

The Credit Information Sharing (CIS) initiative, coordinated by CIS Kenya, facilitates data sharing between financial institutions and Credit Reference Bureaus including TransUnion, Metropol, and Creditinfo. These data-sharing systems are transforming how lenders assess risk and provide credit to MSMEs and individual borrowers.

Digital lending platforms, mobile banking, and alternative data sources like mobile payment records enable previously unbanked MSMEs to build credit histories. These technological innovations promote financial inclusion by expanding credit access to underserved segments, including women and youth who may lack traditional credit histories.

Government Support and Policy Alignment

The new pricing model aligns with broader government initiatives to enhance MSME access to finance. The Credit Guarantee Scheme (CGS) established by the National Treasury aims to enhance access to credit by MSMEs through risk-sharing mechanisms with participating financial intermediaries.

The government has set aside 30 percent of all government procurement for youth, women, and persons with disabilities under the Access to Government Procurement Opportunities (AGPO) programme, creating market opportunities that complement improved credit access.

Recent commitments from financial institutions demonstrate growing recognition of underserved market opportunities. At the Kenya Young Africa Works Dialogue, Equity Bank committed KSH 130 million to digital infrastructure investment, while KCB announced KSH 250 billion in lending for women-led businesses.

International Development Support

Kenya’s MSME sector has received significant international support, including the $100 million Supporting Access to Finance and Enterprise Recovery (SAFER) project financed by the International Development Association. This initiative aims to address market failures in access to finance by MSMEs, particularly those owned by youth and women, that were negatively impacted by the COVID-19 pandemic.

The project supports more than 250,000 MSMEs through fostering innovation, providing liquidity through microfinance banks and SACCOs, and de-risking lending. Such international partnerships complement domestic reforms like the new pricing model by addressing both supply and demand side constraints in credit markets.

Technology Integration and Digital Innovation

The new framework leverages technological advances in credit assessment and risk management. Digital lending platforms and alternative data sources enable financial institutions to evaluate creditworthiness using non-traditional metrics, potentially benefiting MSMEs and individuals with limited formal credit histories.

Mobile payment records, utility payment histories, and other digital footprints can supplement traditional credit scoring, particularly important for women entrepreneurs and youth who may lack extensive formal financial records. This technological integration supports the risk-based pricing model’s objective of more accurately assessing individual borrower risk.

The CBK’s Total Cost of Credit portal will serve as a centralized platform for rate comparison and transparency, empowering borrowers to make informed decisions. This digital transparency tool should enhance competition among lenders and drive better terms for borrowers across all market segments.

Economic Impact and Growth Implications

Kenya’s MSMEs employ approximately 14.9 million people and contribute significantly to economic growth, making improved credit access crucial for broader economic development. The new pricing model should support the government’s Bottom-Up Economic Transformation agenda by enabling more enterprises to access growth capital.

Research indicates that enhanced services for MSMEs can support business objectives of financial institutions while positively impacting enterprise growth. Studies have shown median annualized growth rates of 10% for enterprises receiving improved financial services, demonstrating the potential economic multiplier effects of expanded credit access.

The alignment with international best practices should also support Kenya’s integration into global financial markets and potentially reduce the country’s risk premium, benefiting the broader economy through improved access to international capital.

Future Outlook and Monitoring

The first test of the new system will come in September 2025 when banks begin offering new loans under the revised framework. How financial institutions disclose and justify their risk premiums will determine whether the new model fulfills the CBK’s promise of fairer and more transparent lending practices.

Industry observers will monitor several key metrics, including changes in credit access rates for underserved groups, the effectiveness of monetary policy transmission, and overall credit market competitiveness. The success of the model may influence similar reforms in other East African markets seeking to enhance financial inclusion.

The CBK has indicated its commitment to ongoing monitoring and adjustment of the framework based on implementation experience. This adaptive approach should help ensure that the system achieves its objectives while minimizing unintended consequences for lenders or borrowers.

Conclusion and Strategic Significance

The Kenya Bankers Association’s endorsement of the CBK’s new risk-based loan pricing model represents a watershed moment for Kenya’s financial sector. The introduction of KESONIA as a transparent, market-based benchmark combined with individualized risk assessment promises to address longstanding challenges in credit access and pricing transparency.

For underserved groups including MSMEs, youth, women, and persons with disabilities, the new framework offers hope for improved access to formal credit on fairer terms. The emphasis on credit history and risk-based pricing should reward good borrowers while encouraging responsible borrowing behavior across all market segments.

The success of this reform will largely depend on effective implementation by banks and continued regulatory oversight by the CBK. The six-month transition period provides an opportunity to address technical challenges while ensuring that the system delivers on its promise of enhanced transparency and expanded credit access.

As Kenya seeks to accelerate economic growth and achieve its development objectives, improved financial inclusion through fairer credit pricing could prove to be a critical enabler. The new model positions Kenya as a leader in financial sector reform within the East African region and provides a template for other markets seeking similar improvements.

The banking industry’s commitment to supporting implementation, combined with government policies promoting MSME development and international support for financial inclusion initiatives, creates a favorable environment for the new model’s success. The coming months will be crucial in determining whether this ambitious reform delivers its promised benefits to Kenya’s economy and underserved populations.

The new risk-based loan pricing model will take effect for all new variable-rate loans from September 1, 2025, with existing loans transitioning to the system by February 28, 2026. Banks are currently updating their pricing models and seeking board approvals to comply with the new framework.

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By: Montel Kamau

Serrari Financial Analyst

4th September, 2025