The Central Bank of Kenya (CBK) has announced plans to introduce changes to its current lending rate framework, known as the Risk-Based Credit Pricing Model (RBCPM).
In a public notice dated Wednesday, April 23, CBK invited interested stakeholders to submit their input on the proposed revision to the RBCPM, a key mechanism used by banks to determine lending rates.
“The Central Bank of Kenya (CBK) announces the issuance of a consultative paper on the Review of the Risk-Based Credit Pricing Model for public comments,” read part of the notice.
According to the regulator, the consultative paper seeks feedback from the stakeholders on the proposed updates.
The paper can be downloaded from the CBK website at https://www.centralbank.go.ke/2025/04/22/cbks-consultative-paper-on-risk-based-credit-pricing-model/, and feedback should be submitted by May 2, 2025.
The stakeholders are encouraged to send their comments via email to [email protected] with the subject line: COMMENTS – CONSULTATIVE PAPER ON THE REVIEW OF THE RISK-BASED CREDIT PRICING MODEL.
The RBCPM was introduced in 2019 as a collaborative strategic initiative between the CBK and the banking sector.
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It was part of a broader reform agenda aimed at addressing persistent challenges in the credit market, including high lending rates and opaque pricing mechanisms, by creating a market-driven approach to pricing credit risk.
CBK noted that with the lapse of five years, a reassessment of the RBCPM is necessary to determine whether it still effectively complements ongoing banking sector reforms.
One of the proposed changes includes the use of the Central Bank Rate (CBR) as a common reference rate for determining lending rates across the banking sector.
The CBR reflects the cost of funding for banks. Under the revised model, lending rates will be determined by adding a premium (“K”) to the CBR.
Regulator’s Proposal on the Lending Model Rate
To enhance transparency, CBK will publish the breakdown of each bank’s lending rate premium (“K”) on its website, the Total Cost of Credit (TCC) portal, and in two newspapers with nationwide circulation.
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Additional proposals from CBK include:
- The lending rate premium (“K”) will comprise:
a) Operating costs related to lending;
b) Return to shareholders;
c) Borrower’s risk premium.
2. Where a bank’s cost of funding is higher or lower than the CBR, the difference will be factored into the premium (“K”), subject to CBK review.
3. Banks will be required to submit their proposed premium (“K”) to CBK for review before implementation.
4. The new model will apply to all loans as defined under clause 1.4.3 of the CBK Prudential Guideline on Risk Classification of Assets, Provisioning, and Limitation on Interest Recoverable on Non-Performing Loans (CBK/PG/04).
a) For new loans, the model will apply immediately upon the effective date.
b) For existing loans, banks will transition accordingly.
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