Revised Risk-Based Credit Pricing Model (RBCPM) By CBK - What it means for New loan borrowers and Existing Loan Borrrowers

Breakdown of the Revised RBCPM

1. Common Reference Rate

• KESONIA (Kenya Shilling Overnight Interbank Average) is now the main benchmark. What does this Mean?

ü  KESONIA is Kenya’s new benchmark interest rate that reflects the average rate at which banks lend and borrow unsecured overnight funds in Kenyan Shillings. It is calculated daily from actual interbank transactions and administered by the Central Bank of Kenya (CBK).

Explanation

1. Definition

KESONIA stands for Kenya Shilling Overnight Interbank Average.

ü  It is a transaction-based benchmark rate, meaning it is derived from real overnight lending and borrowing between banks, not estimates or surveys.

ü  It represents Kenya’s near risk-free reference rate (RFR) because overnight unsecured lending carries minimal credit or term risk.

2. Purpose

ü  Introduced by CBK in September 2025 as part of reforms to modernize Kenya’s benchmark interest rate framework.

ü  It was Designed to increase transparency, reliability, and market confidence in loan pricing.

ü  It Aligns Kenya with global best practices, similar to that of SONIA (UK) and SOFR (US).

3. How It Works

ü  It is Calculated as a volume-weighted average of actual overnight interbank transactions.

ü  It is Published daily at 9:00 a.m. by CBK, alongside the KESONIA Compounded Index, which shows the cumulative effect of compounding daily rates over time.

ü  If KESONIA data becomes unavailable, the Central Bank Rate (CBR) serves as the fallback reference.

4. The Role in Credit Pricing

ü  Under the Revised Risk-Based Credit Pricing Model (RBCPM), lending rates are set as:

Loan Rate = KESONIA + Premium (K)+ Fees/Charges

ü  This will automatically ensure borrowers’ loan costs are directly linked to market conditions and their individual risk profile. Does this give you some hope?

5. Expanded Implications

ü  For borrowers: Loan rates will adjust more quickly to market changes, making borrowing costs more responsive but potentially more volatile.

ü  For banks: Provides a transparent, standardized benchmark for pricing loans, improving competition and fairness.

ü  For the economy: Strengthens monetary policy transmission, as CBK decisions influence interbank rates which then flow directly into lending rates

 

2. Premium ("K")

Banks will add a premium to KESONIA, which is made up of:

• Operating costs (staff, rent, depreciation, etc.)
• Return to shareholders (this is the profit margin)
• Borrower’s risk premium (based on credit scoring and risk profile)

3. Total Cost of Credit (TCC) (Total Loan Cost)

Total Cost of Credit = KESONIA +K(Premium) + Fees/Charges

• Fees in this case may include origination, arrangement, commitment, default, and late payment fees.
• All components must be disclosed to customers (This implies that before you sign the loan form, ask for a written documentation of the total cost of the loan you are borrowing, authenticated by the institution you are borrowing), CBK, and published on the TCC (Total Cost of Credit) website.

4. Implementation Timeline to banks and lending institutions

• Banks have 3 months to develop and approve their models.
• Then 3 months transition to roll them out.
• This Applies to all variable rate loans, except:
• Foreign currency loans
• Fixed rate loans

5. Transparency

• Banks must publish weighted average lending rates, premiums, fees, and APRs monthly on the TCC website.

Example of a Customer Borrowing Scenario

Let’s imagine a customer, Mary Adhiambo a business lady at  the heart of Kisumu City, borrowing KES 1,000,000 for  a period of 1 year under the new model of borrowing

Step 1: Reference Rate

• Assume KESONIA compounded rate = 11.40% (from CBK daily publication- check every 9.00 a.m).

Step 2: Premium ("K")- as explained earlier.

Mary’s bank sets:

• Operating costs at = 2.0%
• Shareholder return at  = 1.5%
• Borrower risk premium (Mary has stable income, moderate risk) = 2.0%

-          This means if you are more unstable, the higher the risk and the higher you Borrowers risk premium. It therefore means the bank will analyse your credit history performance and give you your Borrowers risk premium. (Ensure you have outstanding CRB record)

Therefore:

K = 2.0% + 1.5% + 2.0% = 5.5%

 

Step 3: The Lending Rate (The rate the bank will lend Mary)

Lending Rate = KESONIA + K = 11.40% + 5.5% = 16.9%

Step 4: Fees/Charges (origination, arrangement, commitment, default, and late payment fees)

• Loan origination fee = 1% of loan = KES 10,000
• Commitment fee = KES 5,000

Step 5: Total Cost of Credit

• Interest for 1 year = 1,000,000×16.9%

= KES169,000

• Fees = KES 15,000
• Total repayment = KES 1,184,000

What Mary Sees while borrowing

• Principal borrowed: KES 1,000,000
• Interest rate: 16.9% (KESONIA + K)
• Fees: KES 15,000
• Total repayment after 1 year: KES 1,184,000
• All the details disclosed on her loan agreement and visible on the TCC website (https://costofcredit.co.ke ). So ensure you check after borrowing.

Implications for Borrowers under the new Model

1. Transparency in Loan Pricing

• Borrowers will now see a clear breakdown of their loan cost:
• KESONIA (reference rate)
• Premium (K) → operating costs, shareholder return, borrower’s risk premium
• Fees/Charges → origination, commitment, late payment, etc.
• This makes it easier for borrowers to compare loans across banks via the Total Cost of Credit (TCC) website.( https://costofcredit.co.ke )

2. Risk-Based Differentiation

• Borrowers with strong credit profiles (stable income, good repayment history) will enjoy lower risk premiums.(CRB is key here to borrowing lower interests loans)
• Borrowers with weaker profiles (unstable income, poor repayment history) will face higher interest rates.
• This will encourage responsible borrowing and repayment discipline.

3. Market-Linked Interest Rates

• Since KESONIA is market-based, loan rates will move with interbank market conditions.
• Borrowers may experience faster transmission of monetary policy changes when CBK adjusts policy, loan rates adjust quickly.
• This means greater volatility compared to fixed-rate loans, but also fairer reflection of real funding costs.(Your loan amount repayment changes anytime)

 

4. Higher Disclosure of Fees

• Banks must disclose all fees and charges upfront before you sign up the loan form. Do not be anxious and overzealous for the loan till you forget this.
• Borrowers can anticipate the true cost of borrowing, reducing hidden charges.
• However, this also means borrowers may face more itemized costs like (e.g., origination + commitment + late fees).

5. Transition Period

• Existing variable-rate loans will shift to the new model after a 6-month transition.
• Borrowers with ongoing loans may see their repayment terms change, especially if their risk profile differs from when the loan was first issued.

6. Borrower Empowerment

• With the revamped TCC website (https://costofcredit.co.ke ), borrowers can compare products across banks more easily.
• This increases competition among banks, potentially lowering costs for creditworthy borrowers.
• Borrowers will gain more bargaining power when negotiating loan terms with various lending institutions.

Practical Example of Implications

Imagine Mary (from our earlier example) and James both borrow KES 1,000,000:

• Mary has a strong repayment history → her risk premium is 2%.
• Lending rate = KESONIA (11.4%) + 5.5% = 16.9%.
• Total repayment ≈ KES 1,184,000 after 1 year.
• James has a weaker profile (missed payments before) → his risk premium is 6%.
• Lending rate = KESONIA (11.4%) + 9.5% = 20.9%.
• Total repayment ≈ KES 1,224,000 after 1 year.

Conclusion: Borrowers with poor credit history pay significantly more for the same loan amount.

The Bottom Line for borrowers

For borrowers, the revised RBCPM means:

• Fairer, more transparent pricing
• Direct link between personal creditworthiness and loan cost
• Potentially higher volatility in interest rates
• Greater ability to compare and choose loans wisely

Think, reflect, compare, decide before you make a choice for any loan product offered by any bank or other lending institutions