The Central Bank of Kenya (CBK) is urging commercial banks to swiftly lower lending rates in response to the rollout of a revised risk-based pricing model.

The reform is expected to improve the effectiveness of monetary policy and ease the burden of high credit costs for borrowers across the country.

CBK Governor Dr. Kamau Thugge revealed that the final version of the model is nearly complete and will be implemented shortly after public and stakeholder feedback is consolidated. The framework aims to better reflect borrowers’ creditworthiness and the Central Bank Rate (CBR) in loan pricing.

“We would want the policy rates to be transmitted as quickly as possible to the lending rates,” said Dr. Thugge. “There has been a lag in reducing interest rates, even when we’ve cut the CBR. That’s what we’re trying to address.”

Strict risk based pricing

Lenders have previously voiced concerns that reintroducing a stricter risk-based pricing regime would amount to indirect price controls. However, the CBK dismissed those claims, asserting that the new model is about fairness, efficiency, and transparency—not control.

In recent years, CBK has struggled with the uneven transmission of policy signals. When it raises the CBR, commercial banks are quick to hike loan rates. But when the rate is lowered, the benefits to borrowers often come late or not at all. This asymmetry has weakened monetary policy and left many Kenyans grappling with persistently expensive credit. To fix this, the CBK’s revised model will require lenders to adjust interest rates in a more disciplined manner, factoring in both macroeconomic conditions and a borrower’s repayment history. According to CBK, visits to banks in June 2025 are planned to assess compliance and ensure the institutions are aligning their lending practices with the new guidance.

Public particpation

“As you may know, we did have public participation to review the risk-based pricing model. We do hope that by next week we shall have received all the feedback, and we shall be coming to the public with a new risk-based pricing model that transmits the monetary policy rate sooner,” Thugge stated.

CBK was reported to have mentioned plans to visit banks in June 2025 to ensure they are aligning lending rates with your guidance.

Under the current system, banks must seek CBK approval for their internal pricing models before offering flexible-rate loans. This has created space for some lenders to keep margins wide, even as the economic environment improves.

Meanwhile, the country’s credit market is under strain, with non-performing loans (NPLs) having risen to 17.6 per cent, a multi-year high that signals deeper financial distress for both households and businesses. High interest rates, legacy debts, and a sluggish economy have left many borrowers unable to keep up with repayments.

Analysts believe the CBK’s urgency in rolling out the revised pricing model is partly driven by the need to reverse this trend. A system that rewards strong credit behavior and adjusts rates fairly could support struggling but viable borrowers while deterring risky lending.

Once the model is introduced, borrowers with solid repayment records could start seeing lower rates on new or renegotiated loans. Still, the real impact will depend on how diligently banks implement the framework and how effectively CBK enforces it.

While the regulator has not said whether the model will be mandatory for all banks, Dr. Thugge has made it clear that faster transmission of monetary policy is non-negotiable.

For commercial banks, this shift may compress interest margins in the short term. But it also promises long-term benefits: improved loan performance, deeper customer trust, and better alignment between risk and reward. Lenders will need to embrace data-driven assessments and adopt systems that can adapt to changing policy signals. Kenya’s broader economic challenges—from inflation and currency instability to rising debt—make it even more important that credit is priced accurately and responsibly. An efficient, transparent loan pricing mechanism could become a cornerstone of financial inclusion and sustainable growth.