The Central Bank of Kenya (CBK) has rejected a request to exempt loans to commercial bank staff, short-term working capital financing, and credit card facilities from the new risk-based pricing formula, signalling higher interest costs for those borrowers who previously enjoyed preferential interest rates.
In the new model, the CBK has only exempted foreign currency-denominated loans and fixed-rate facilities from the new pricing model, which will be fully operational for all affected facilities by March 2026.
The new model will use the interbank rate as the common reference rate, which will be referred to as the Kenya Shilling Overnight Interbank Average (KESONIA).
When the CBK issued a consultative paper in April and called for stakeholder comments ahead of the rollout of the new pricing model, several respondents, including commercial banks, manufacturers, consultancy firms, the International Monetary Fund (IMF), and individuals, called for the exclusion of facilities deemed to have unique contracts compared to ordinary loans.
The facilities cited included foreign currency-denominated loans, credit card loans, negotiated loans, staff loans, institutional scheme loans, and digital lending products.
Others are Islamic facilities, trade loans, syndicated loans, fixed-rate loans, cash-covered loans, short-term loans, loans under special arrangements, and fee-based facilities.
“These were cited to have peculiar contracting arrangements on which their pricing should be based,” said the CBK in a notice on August 26 announcing the new risk-based pricing model.
The banking regulator, however, included only the foreign currency facilities and fixed rate loans on its exemption list, effectively subjecting all the other facilities to the reference rate on which the lenders will add a premium (“K”) to cater for a borrower’s risk premium, returns to shareholders, their operating costs related to lending, and loan processing fees.
“The new model will apply to all variable rate loans except for foreign currency-denominated loans, whose pricing is primarily influenced by external factors such as currency risk, and fixed rate loans,” added the CBK.
In the absence of the exclusions, banks will now choose whether to categorise existing and new loans as either variable or fixed facilities, which will determine whether they fall under the new risk-based pricing model (variable rate loans) or not (fixed rate and foreign currency facilities).
Categorising a loan under the fixed rate regime means that a bank cannot adjust its interest charge upwards when the cost of funding goes up—as determined by a rising interbank rate— while a borrower would also miss out on the benefit of a lower interest rate on the facility when the interbank rate on which it is pegged goes down.
“The revised framework has been highly consultative between the CBK and the Kenya Bankers Association (KBA). We agreed that instead of having a list of exclusions, banks be left at their individual level to determine the loans and facilities that are variable interest rate loans and those that are fixed interest rate loans,” KBA chief executive officer Raimond Molenje told the Business Daily on Friday.
“This is the reason for the CBK brief that new variable loans move to the new framework by December 1, 2025, and existing variable loans move by March 1, 2026.”
The CBK notice issued on Tuesday had indicated that banks would start implementing the updated model on new loans booked from September 1, while granting a three-month window for the lenders to transition existing loans to the new reference rate.
Banks, however, negotiated for a three-month grace period before fully applying the KESONIA rate on new loans, and six months for the transition of existing facilities. This will give them time to calculate the premiums (K) to be applied to different borrowers and have them approved by their respective boards and the CBK.
The extra time will also allow the lenders to determine which facilities to classify as fixed or variable rate loans.
In the meantime, the CBK told lenders in a follow-up circular dated August 28 that they can continue to use the current risk-based pricing model on new loans, but must transition the facilities to the new model as soon as it is approved by their respective boards.
In addition to the new pricing model, banks and the CBK have also committed to reviving the Total Cost of Credit website, which was launched in June 2017 but became out of date in 2023 after lenders failed to regularly update their data on the portal.
When it is revived, it will give borrowers a loan comparison calculator and educational content on credit costs, as well as an up-to-date view on the interest, fees, and charges applicable to loans.
