Towards the end of last year, the Central Bank of Kenya (CBK) rolled out a major policy reform on loan pricing, switching interest rate pricing to a credit risk-based pricing (RBP) framework anchored on the Kenya Shilling Overnight Interbank Average Rate (Kesonia) and a bank-specific “K” factor.
Institutions that were unable to model Kesonia were allowed to continue using the Central Bank Rate (CBR), which is more static and generally less advantageous to banks. The actual transition dates were September 2025 for all new variable-rate loans and February 2026 for existing variable-rate loans.
Analysis of Credit Reference Bureau (CRB) data submitted by banks suggests that the reform has achieved its intended objectives and, in a few corners of the market, greater shifts, perhaps even more than banks bargained for.
Comparing non-performing loan (NPL) rates before and after the introduction of RBP, we see significant changes in performance.
In the data, we observed that large-banks (Tier 1s) aggregate commercial lending saw NPL rates fall from 17.26 percent to 5.43 percent. This does not appear to be the result of immediate credit underwriting improvements but a balance-sheet clean-up executed through either write offs of legacy bad debts or an immediate borrower triggered loan restructure, to avert significant cost escalation.
On shorter term, smaller ticket sizes of below Shi million, NPLs declined from 17.47 percent to 5.19 percent. Here, RBP-driven repricing seems to have encouraged banks to tighten underwriting standards for their SME borrowers. Loans above Sh1 billion at Tier 1 banks experienced a slight increase in NPL rates, from 14.92 percent to 18.18 percent.
Similarly, Tier 3 banks’ largest commercial exposures, which were already among the weakest in the industry, worsened from 48.15 percent to 50.00 percent. Big-ticket lending, remains stubbornly risky regardless of how it is priced.
For Tier 2 banks, we observed that across most loan bands and customer segments, NPLs improved following the introduction of RBP except the Sh10,000–Sh100,000 consumer loan segment, where NPLs surged from 27.91 percent to 44.82 percent.
This segment consists largely of unsecured retail borrowers. This is the segment that risk-based pricing was expected to affect the most since these borrowers typically have the thinnest debt-servicing buffers.
The magnitude of the increase suggests that RBP-driven rate adjustments squeezed borrowers who were already close to the edge, pushing marginal accounts into default rather than simply pricing risk more accurately.
For Tier 3 banks, Consumer lending NPLs increased only modestly, rising by 1.33 percent system-wide. In the Microfinance banks (MFBs) data, we observe that Consumer-loans NPLs still range between 27 percent and 34 percent across the middle loan bands. RBP appears to have had limited impact on MFBs’ underlying risk trajectory, which is unsurprising.
These institutions already serve underbanked and higher-risk customer segments that risk-based pricing is specifically designed to accommodate. As a result, repricing changed less about who they lend to and more about what they charge for lending to already-known risk profiles. The actual result will be seen in the financial performance at the end of the year.
In conclusion, two broader patterns emerge when the tiers are compared side by side.
First, loan volumes grew fastest in the segments where risk appetite appears to have expanded the most.
Second, the segments showing NPL deterioration are concentrated in the same areas: mid-sized retail loans (Tier 2’s Sh10,000–Sh100,000 segment) and large commercial exposures at weaker banks (Tier 3’s above-Sh1 billion segment).
Out of the new framework, banks now possess the pricing tools needed to manage and absorb risks.
The CRB data over the coming quarters will reveal whether that promise holds, particularly for borrowers with the least room to adjust and appear to be cases where RBP’s principles to charge more for higher risk is in conflict with borrowers or exposures that had limited capacity to absorb higher borrowing costs in the first place.
For Kenya’s banking sector, the data in CRB so far supports a cautiously positive assessment.
Risk-based pricing has visibly cleaned up the country’s largest and most systemically important commercial loan book (Tier 1) without triggering a broad-based increase in defaults elsewhere.
However, the sharp deterioration in Tier 2’s mid-market consumer segment and the rapid, largely untested growth of Tier 3’s consumer lending portfolio are the two developments we will observe to see how sustainable they are.
The writer is chief executive officer, Metropol CRB
