Commercial banks have a grace period of up to six month to implement the new formula on loan pricing.
The Central Bank of Kenya (CBK) said that the lenders now have three months up to December 1, 2025, to start using the new pricing model on loans booked, and a six-month window to March 1, 2026, for existing loans.
The CBK had, in a notice issued on Monday, August 26, required banks to start using the new pricing model on loans booked from September 1, which was a one-week notice.
The new model will use the interbank rate as the common reference rate for determining lending rates to all customers.
Banks will be allowed to load a premium (K) on the reference rate, now referred to as the Kenya Shilling Overnight Interbank Average (KESONIA).
Banks, however, petitioned the CBK arguing the one-week window was insufficient to calculate the premium (K) - which is pegged on a bank’s operational costs, return to shareholders, and risk factor of the borrower – and have the model approved internally by their board of directors and then externally by the regulator.
“On the timeline, the same have an error that we have sought clarification from CBK, and we expect the same to be corrected before 1st September,” said Kenya Bankers Association (KBA) Chief Executive Raimond Molenje in response to Business Daily queries.
CBK granted the bankers’ request in a circular issued August 28, while allowing those able to get board approvals earlier than the set deadline to transition, as long as they inform their customers.
“We write to advise as follows with respect to new loans with effect from September 1, 2025: banks may continue to use the current Risk-Based Credit Pricing Model (RBCPM) as they develop and get approval from their boards for the revised RBCPM,” CBK said in the circular.
“Each bank is to start offering customers new loans under the revised RBCPM immediately upon approval by their respective boards," it added.
The new reference rate was a result of consultations between the regulator and bankers following a consensus that the current framework, where each bank has its base rate, has failed to transmit monetary policy actions to the market.
Monetary policy actions, such as the recent reduction of the regulator's benchmark rate - Central Bank Rate (CBR) - have failed to deliver cheaper credit to Kenyan borrowers fast enough.
The Central Bank had in April recommended the use of the CBR as the uniform reference rate for banks, but the industry pushed back, arguing that the CBR did not capture the cost of deposits, which was the determining factor of how they were to price their loans.
“The revised Risk-Based Credit Pricing Model (RBCPM) will take effect from September 1, 2025, for all new variable rate loans. As for existing variable rate loans, the revised RBCPM will take effect from February 28, 2026, at the end of a 6-month transition period for finalisation of the necessary arrangements,” said Central Bank of Kenya in a notice issued on August 26, unveiling the new model.
Commercial Bank had requested a six-month transition period for both new and existing loans to allow for system reconfiguration and operational readiness. CBK had granted their request for the transition of existing loans, but called for an immediate shift for new loans.
“The date, September 1, is the commencement date of the transition period, not the application of a new model on loans,” said Mr Molenje while stating he expected clarification from the regulator.
Use of the overnight interbank rate – KESONIA – as the common reference rate was decided since it is market-based and it closely aligns with the CBR, allowing it to transmit monetary policy.
Introduction of the new pricing model is also expected to allow customers to easily compare prices offered by different banks and vote with their feet.
The cost of credit, which will be disclosed directly to customers, will be the total of the reference rate (KESONIA) plus the premium (K), plus any fees charged on the loan.
