Hope for cheaper credit as more banks roll out new loan pricing model

Borrowers could see cheaper and more transparent loan costs from next week as major banks, under pressure from the regulator, begin rolling out a new interest rate pricing model designed to make lending rates more responsive to monetary policy changes. 

Several commercial banks, including Co-operative Bank, Kingdom Bank, Equity Bank, Standard Chartered, National Bank of Kenya (NBK), KCB Group, and Absa Bank Kenya, have already published notices confirming they will transition to the Central Bank of Kenya's (CBK) revised Risk-Based Credit Pricing Model (RBCPM) from December 1. 

For borrowers, the new system promises greater transparency, allowing for easier comparison of loan products across banks.

However, it also introduces variability, as loans are pegged to a daily rate which could see more frequent, albeit smaller, adjustments in a borrower's monthly repayments. 

“Co-operative Bank is pleased to inform its customers and the general public that we shall transition to the Risk-based Credit Pricing Model in line with the revised Risk-based Credit Pricing Model Guidelines by Central Bank of Kenya (CBK),” said Co-op Bank in a public notice to its customers. 

“Effectively, all new variable-rate Kenya shilling credit facilities from December 1, 2025 shall be under this new pricing model.” 

Other lenders issued similar notices.  

The collective move by additional banks signals a significant shift in the sector after CBK Governor Kamau Thugge recently expressed frustration that only one bank had sought regulatory approval for the new model, with the deadline looming.

The governor had criticised lenders for being quick to raise borrowing costs during tightening cycles but slow to lower them during easing periods. 

The new framework mandates that the price of all new variable-rate loans in Kenyan shillings will be determined by a transparent formula: a publicly-known Reference Rate plus a customer-specific Premium (K). 

The new model fundamentally changes how loan interest is calculated, moving away from opaque, bank-internal benchmarks to a transparent, market-based system, says CBK. 

Under the new model, the Reference Rate will be the base rate, akin to a "base fare" in a taxi ride. 

The Kenya Shilling Overnight Interbank Average (KESONIA) will be the daily average rate at which banks lend to each other overnight and is considered a near risk-free benchmark that reflects real-time market conditions.  

A Premium (K) will be an add-on, similar to "surge pricing" based on demand and route risk. It is a percentage added to the reference rate and is unique to each borrower. 

The premium is determined by the bank based on the borrower's credit risk profile—their credit history and ability to repay—as well as the bank's own operational costs and profit margin.  

Responsible borrowers with strong credit histories are, therefore, likely to receive lower premiums. 

The Total Cost of Credit (TCC) will be a crucial feature of the new model, which is the requirement for banks to disclose all costs upfront.  

The TCC, often expressed as an Annual Percentage Rate (APR), includes the interest rate (Reference Rate + Premium K) plus all applicable fees and charges, such as arrangement, legal, and insurance fees. This gives borrowers a complete picture of the loan's cost. 

The transition will happen in two phases. All new variable-rate loans from December 1, 2025, will be priced under the new model.

All existing variable-rate loans will be migrated to the new framework by February 28, 2026. Banks are required to notify affected customers at least 30 days in advance. 

The reform is a direct response to a long-standing disconnect between the CBK's policy and commercial lending rates. Despite the CBK cutting its benchmark rate eight times in a cycle that began last year, most recently to 9.25 per cent, average commercial bank lending rates remained elevated at 15.1 per cent as of September. 

"This new framework… will automatically imply that every time we lower the policy rate… that immediately, the customers from the banks will experience an immediate reduction in their interest rate. That is the intention of this new policy framework," Governor Thugge had argued earlier. 

The banking sector's race to comply increases pressure on remaining institutions ahead of the CBK's final Monetary Policy Committee (MPC) meeting of the year on December 9, where policymakers will evaluate the effectiveness of monetary policy amid this landmark transition.