Poor credit culture deters Kenya's lending transition

Kenyan banks continue to face challenges in setting credit risk premiums due to the absence of a robust credit rating culture in Kenya's debt market.

This is despite the introduction of the benchmark interest rate by the Central Bank of Kenya, to enhance transparency, reliability and market confidence in domestic financial markets.

Regulators have been urged to formally recognize rating agencies to foster transparency, as ratings enhance credit awareness. At the same time, the local capacity of local rating agencies has been lauded, while dismissing the recurrent use of foreign rating agencies.

“Borrowing does not require importing expertise from London or the U.S. Local knowledge is crucial in African countries to capture nuances not well documented elsewhere and make accurate assessments,” Agusto and Co ltd, credit rating agency said.

The launch of Kenya Shilling Overnight Interbank Average (KESONIA), according to credit rating agency Agusto and Co limited, represents a transformative advance for Kenya's financial sector by introducing transparency and real-time market liquidity reflection.

KESONIA is the benchmark rate for secured overnight lending and borrowing in Kenyan shillings among banks and industry players. Modeled on global standards like SOFR and SONIA, it promotes best practices and market discipline

The rating agency has argued that the new benchmark reflects actual funding conditions and promotes greater transparency in credit pricing in the Country.

While its daily, transaction-based nature means it will be more volatile than the Central Bank Rate, this volatility is said to be a reflection of real market activity.

According to Yinka Adelekan, Group Chief Executive Officer of Agusto and CO, the benchmark sets stage for a more efficient, transparent and risk-sensitive financial system, ultimately improving monetary policy transmission and supporting the development of a deeper, more responsive capital market.

However, she notes, Kenya’s credit market needs to deepen to reduce dependency on banks loans, especially for long tenure funding.

“Kenya needs to strengthen credit transparency, by moving toward data-driven credit evaluation,” Mrs Adelekan said, reiterating that banks need internal credit scoring models to assess counterparty risks.

“Ratings make borrower risk visible and comparable,” she added that this ensures that credit decisions are based on real financial behavior, not just relationships or asset ownership, creating a more transparent and inclusive marketplace.

In addition, the rating agency has recommended guarantee institutions which bridge confidence gaps for sectors like SMEs and agribusiness.

As Kenya’s credit rating environment grows, the need to deepen the debt market to reduce bank dependency- especially for long-term funding, has been reiterated.

Credit rating agencies play a pivotal role in deepening the debt market by acting as information bridges between issuers, investors and lenders.

Further, they build market confidence, expand the investor base, and reduce the overall cost of capital.

With Kenya’s credit ratings culture still in its formative stage, the need for regulatory alignment has been emphasized.

 “Also, the debt market needs to be deepened, encouraging obligors to come in their own capacity to borrow from the debt market,” Mrs Adelekan said.

KESONIA, together with credit guarantees and credit ratings have been highlighted as pillars for a deeper, transparent and investor friendly debt capital market.

“They form a powerful ecosystem of trust and transparency - where prices reflect risk, risk is measurable, and investors have confidence in repayment discipline.”

“This alignment not only reduces pricing distortions but also opens Kenya’s debt capital market to a broader class of institutional investors, who seek predictable, well-rated, and de-risked investment opportunities,” Mrs Adelekan.

The agency has observed that Kenyan markets must shift from collateral-based lending to evaluating entities based on creditworthiness.

“Availability of rich data is essential to appraise sectors like SMEs, and agriculture often perceived as high risk, to facilitate lending,” Mrs Adelekan.