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The Central Bank of Kenya (CBK) and commercial banks are at odds over the direction and implementation of policies aimed at lowering credit costs, impacting private sector lending and economic growth.
The Central Bank of Kenya (CBK) and commercial banks are currently engaged in a significant debate regarding the cost of credit in the country. Banks are advocating for a further reduction in the Central Bank Rate (CBR), the benchmark lending rate, citing low inflation and a stable shilling as factors that create room to stimulate private sector credit growth. The Kenya Bankers Association (KBA), the industry lobby, urged the CBK's Monetary Policy Committee (MPC) to lower the CBR from its current 9.50 percent during its meeting on October 7, 2025, to facilitate cheaper lending.
This push for lower rates comes as the CBK implements a revised Risk-Based Credit Pricing Model (RBCPM), which took effect on September 1, 2025. The new model anchors variable-rate loans in Kenya Shillings to the Kenya Shilling Overnight Interbank Average (KESONIA) plus a bank-specific premium 'K' and other fees. KESONIA, which replaces the Central Bank Rate (CBR) as the primary benchmark, is intended to make commercial lending more market-driven and transparent.
The dispute over credit costs is not new. The CBK has previously accused commercial banks of being slow to pass on the benefits of lower CBR to borrowers. In April 2025, the CBK revealed that some commercial banks had been denying creditworthy borrowers access to cheaper loans due to improper application of their risk-based pricing models and the imposition of additional charges. Inspections by the CBK found that several banks were not adhering to agreed-upon models, breaching the Kenyan banking sector charter and risking regulatory penalties.
The CBK has lowered the CBR seven times between August 6 and August 12, 2025, bringing it down from 13 percent to 9.5 percent. Despite these reductions, the impact on actual lending rates for consumers has been marginal, with many banks making only slight adjustments. For instance, KCB Bank lowered its lending rate by one basis point to 14.6 percent from 15.6 percent, while Co-op Bank's rate dropped from 16.5 percent to 14.5 percent.
The revised Risk-Based Credit Pricing Model (RBCPM) is a key policy intervention by the CBK. It aims to strengthen monetary policy transmission, enhance transparency, and ensure lending accurately reflects borrower risk profiles. Under this framework, banks are required to disclose weighted-average lending rates, the size of their premium 'K', and all charges for each product on their websites and the Total Cost of Credit (TCC) platform. The TCC platform, launched in June 2017 in collaboration with the KBA, provides a standardized method for calculating the total cost of credit, including interest rates, legal fees, and insurance, to help borrowers compare loan options.
The transition to the new model mandates that new variable-rate loans be priced using KESONIA from September 1, 2025, with existing loans migrating by February 28, 2026, following a six-month transition period. Banks are expected to update contracts, systems, and pricing models accordingly.
The primary stakeholders in this debate are the Central Bank of Kenya (CBK) as the regulator, and commercial banks, represented by the Kenya Bankers Association (KBA). Other stakeholders include financial institutions, consultancy firms, academia, industry associations, and, crucially, borrowers, particularly Small and Medium-sized Enterprises (SMEs) and low-income earners who are most affected by credit costs.
The ongoing tension between the CBK and commercial banks poses several risks. If banks continue to resist lowering lending rates, it could stifle private sector credit growth, which is crucial for economic expansion. High borrowing costs disproportionately affect SMEs and individuals, hindering their ability to invest and consume. Conversely, if the CBK's new pricing model is not effectively implemented or if banks find ways to circumvent its intent, the goal of cheaper and more transparent credit may not be achieved. The increase in non-performing loans (NPLs) to 17.6 percent by June 2025 also presents a challenge, as banks may remain cautious in lending despite policy directives.
The full impact of the new KESONIA-anchored pricing model on actual lending rates and private sector credit uptake remains to be seen. It is also unclear how quickly and comprehensively all commercial banks will comply with the new disclosure requirements and adjust their internal systems to the revised framework. The long-term effects on bank profitability and competitiveness within the sector are also yet to be fully understood.
Observers will be closely watching the CBK's MPC decision on October 7, 2025, and the subsequent response from commercial banks. The effectiveness of the new KESONIA-anchored pricing model in achieving lower and more transparent credit costs will be a key indicator. The trend in private sector credit growth and the evolution of non-performing loans will also provide insights into the health of the banking sector and the broader economy.
The debate over cheaper credit is linked to broader efforts to enhance financial inclusion and stimulate economic activity in Kenya. Previous attempts to control interest rates, such as the interest rate caps repealed in 2019, have had mixed results, sometimes limiting credit access for high-risk borrowers. The ongoing reforms aim to strike a balance between promoting affordable credit and maintaining a stable and profitable banking sector.
