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The Central Bank of Kenya (CBK) has proposed scrapping the risk-based credit pricing model in favor of pegging lending rates to its benchmark policy rate, a major shift aimed at lowering borrowing costs and improving access to credit for households and businesses.
The decision follows frustration within the CBK over the banking sector’s reluctance to lower interest rates despite multiple reductions in the benchmark lending rate since October 2024. The CBK recently cut the Central Bank Rate (CBR to stimulate lending and economic activity, but banks have largely maintained high lending rates, citing internal risk assessments.
“CBK proposes the use of the policy rate (Central Bank Rate) as the common reference rate for determining lending rates in the Kenyan banking sector,” CBK said on Wednesday.
“The lending rates will be determined by adding a premium to the CBR. CBK will publish the components of each bank’s lending rate premium on its website, the Total Cost of Credit (TCC) website, and in two newspapers of nationwide circulation.”
Interest rates will be set by adding a premium—“K”—to the Central Bank Rate (CBR). The premium will include the bank’s operating costs tied to lending, the return expected by shareholders, and the borrower’s risk profile.
The outgoing risk-based pricing model, which allowed banks to decide on loan rates depending on individual borrower profiles, has faced criticism for being opaque and prone to abuse. When it was introduced in 2019, the regulator intended to encourage lending to riskier customers; in practice, it has resulted in prohibitively high rates, especially for SMEs and households without credit histories.
“CBK’s expectation of the risk-based model was to promote responsible lending practices by aligning credit pricing with borrowers’ risk profiles while ensuring transparency and fairness,” the regulator said.
Under the model, banks combined the base rate as a reference rate with risk-adjusted factors, such as a borrower’s creditworthiness, collateral, and overall financial behaviour.
By pegging interest rates on CBR, the Central Bank of Kenya hopes to improve the transmission of monetary policy decisions to borrowers and push for transparency in a market that has been criticised for opacity. For borrowers, it could mean lower and predictable interest rates.
