No more hidden fees as CBK moves to enforce new loan pricing model

The Central Bank of Kenya (CBK) has introduced a new loan pricing system that will change how borrowers pay interest on loans in a significant move to make lending by commercial banks more transparent and responsive. 

The new rules take effect on September 1, 2025, for all new variable-rate loans. Existing variable-rate loans will transition to the new system by February 28, 2026.

For years, many Kenyans have struggled to understand why their loan costs remained high even when the Central Bank reduced its benchmark lending rate, long used to determine the pricing of loans and other financial products.

The new reform aims to address that opacity while creating a fairer, more competitive lending environment. 

Under the new rules, borrowers with strong credit histories—those who consistently repay loans on time—are likely to receive lower premiums or costs for loans.

Conversely, those with riskier profiles may pay more. This rewards financial responsibility while encouraging others to improve their creditworthiness. 

“The Central Bank of Kenya announces the issuance of a revised Risk-Based Credit Pricing Model (RBCPM) for the banking sector. The final revised RBCPM follows a consultation period announced on April 23, 2025,” said the regulator in a notice on Tuesday. 

CBK stated that the “objective of the revised RBCPM is to strengthen monetary policy transmission, enhance transparency in lending, and promote responsible lending by aligning credit pricing with the borrowers’ risk profiles.” 

Think of the new loan pricing system like a taxi ride with a hailing app. Previously, loan pricing was like agreeing on a fixed fare that didn't always reflect the actual cost of the journey. Now, your loan interest will be calculated using a transparent formula. 

The total lending rate will be made up of a base rate referred to as KESONIA plus a Premium referred to as ("K"). The total cost of credit also includes fees and charges. 

KESONIA, or the Kenya Shilling Overnight Interbank Average, is like the base fare on a taxi app.

It represents the daily rate at which banks lend to each other. CBK notes that KESONIA "is a transaction-based benchmark rate reflecting the average interest rate at which banks in Kenya lend and borrow unsecured overnight funds in Kenyan shillings" and is "designed to serve as Kenya's near risk-free reference rate." 

Just as traffic conditions can change the cost of a ride, economic conditions will cause this rate to move up or down daily.

On the other hand, Premium (“K”) is like the additional charges on your taxi ride. It covers the bank’s operational costs, its return to shareholders, and a charge based on your personal risk profile as a borrower (a risky route might cost more). Responsible borrowers with good credit histories may see lower premiums. 

Fees and charges are like extra charges for toll roads or extra stops. They include loan origination, arrangement, and late payment fees. These charges must now be clearly disclosed to customers and the public.

The CBK specifies that these fees "may include loan origination, arrangement, commitment, default, and late payment fees, which are charged separately and must be disclosed to the customers and CBK." 

"The final revised RBCPM is anchored on the overnight interbank average rate, now renamed the Kenya Shilling Overnight Interbank Average (KESONIA), to align it to the international best practices," said CBK. 

The new system means greater transparency for borrowers. For the first time, banks will be required to publicly break down their loan pricing.

Each lender must publish its average rates, premiums, and fees on its website and the CBK’s Total Cost of Credit (TCC) portal.

The CBK specifies that all banks will "on a monthly basis, publish their weighted average lending rates, and weighted average premium ('K'), all fees and charges for all their lending products, and Annual Percentage Rate (APR) on the Total Cost of Credit website." 

The new system is designed to ensure that when CBK adjusts its policy rate, commercial banks reflect these changes more quickly in their lending rates.

This is what's known as monetary policy transmission, a process that makes the central bank's actions more effective.

The report states this new model "enables immediate transmission of monetary policy to the real sector through adjustments in bank interest rates and responds in real time to changes in market conditions."

This means borrowers could benefit sooner when rates fall, but may also face increases sooner when rates rise. 

To prevent banks from setting unfairly high premiums, the CBK will review each bank’s pricing model. This ensures that the premiums charged are justified and based on actual costs and risks.

The CBK explains that it "will review each bank's model, policies and procedures, post implementation as part of its surveillance process." 

While the new model promotes fairness, it also introduces greater variability for borrowers with variable-rate loans. Since KESONIA changes daily, monthly repayments could become less predictable.

Borrowers who prefer stability may want to consider fixed-rate loans, which are unaffected by these changes.

CBK clarifies that 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." 

The CBK’s overhaul marks a new step toward a more transparent and efficient lending system.

By demystifying loan pricing and aligning it with market conditions, the reforms empower borrowers to make informed financial decisions on borrowing.

Borrowers are encouraged to use the TCC portal to compare loan products and consult with banks to understand how their risk profile affects their costs.