Kenya: Review of the Risk-Based Credit Pricing Model
The Central Bank of Kenya (CBK) is proposing to review the current pricing model for commercial banks in Kenya. Banks have been using the Risk-Based Credit Pricing Model (RBCPM) established in 2019, following the repeal of the interest rate capping. Five years into the implementation of the RBCPM, the CBK has noted concerns about the application of the RBCPM by commercial banks in Kenya.
Currently, the RBCPM is comprised of two components – the base rate and margin. The base rate under the RBCPM is a factor of cost of funds, cost of capital and operating expenses while the margin is a spread based on risk rating.
In the new model proposed by the CBK, the lending rate will be the aggregate of the policy rate (Central Bank Rate (CBR)) and a premium (“K”). The premium (“K”) will be comprised of the bank’s operating cost, return to shareholders and the borrower’s risk premium. Banks will be required to submit their proposed premium (“K”) to the CBK for review and noting before rolling out.
The CBK will publish the components of each bank’s lending rate premium (“K”) on the Total Cost of Credit (TCC) website and in two newspapers of nationwide circulation. The new model will apply to all loans (including existing loans that need to be transitioned to the new model within 3 months from the effective date).
The CBK does not favour a proposal by commercial banks to use the interbank rate as a reference rate for determining the pricing of consumers’ loans, saying it will not accurately reflect their true cost of funding.
Commercial banks and the public are invited to provide their comments on the proposed pricing model to the CBK by Friday, May 2, 2025.
Bowmans remains available to offer further guidance on the proposed pricing model and its impact on your business.
