KENYA Law and Practice Contributed by: Walid Khan, Ruth Wangui Rukwaro and Christina Wanjiku Wood, Africa Law Partners
New Risk-Based Credit Pricing Model The CBK has, effective 1 September 2025, revised the pricing model for banks to a new Risk-Based Credit Pricing Model (RBCPM) anchored on the overnight interbank average rate, now renamed the Kenya Shil- ling Overnight Interbank Average (KESONIA). The objective of the new rate is to: • align it with international best practices; • strengthen monetary policy transmission; • enhance transparency in lending; and • promote responsible lending by aligning credit pricing with the borrowers’ risk profiles. Under the revised RBCPM, the total lending rate is KESONIA + Premium (K), where the premium includes the costs related to lending, return to shareholders, and the risk profile of the borrower. The total cost of credit is thus KESONIA + K + Fees and Charges (Fees and Charges include origination, processing, negotiation and commitment fees). KESONIA stands for the Kenya Shilling Overnight Interbank Average. It is a transaction-based benchmark rate reflecting the average interest rate at which banks in Kenya lend and borrow unsecured overnight funds in Kenyan Shil- lings. The revised RBCPM takes effect from 1 Sep- tember 2025, for all new variable rate loans. As for existing variable rate loans, the revised RBCPM will take effect from 28 February 2026, at the end of a six-month transition period for finalisation of the nec- essary arrangements. Economic Cycles According to the CBK, economic growth decelerated to 4.7% in 2024 from a growth of 5.7% in 2023. The growth, albeit slower, was mainly supported by activi- ties in agriculture, financial and insurance services, transport and storage, real estate, information and communication, wholesale and retail trade, and social sectors. However, growth was largely constrained by the contraction of construction and mining and quar- rying sectors, and a deceleration in growth across key sectors except manufacturing sector. Kenya’s loan market faces macroeconomic challeng- es, including inflation averaging 5–6% in 2025 and Kenyan shilling volatility, driven by global commodity price shocks. The Central Bank of Kenya (CBK) has
adopted a tighter monetary policy, with the Central Bank Rate (CBR) at 9.50% as of August 2025, lead- ing to elevated commercial lending rates (13–18% for SMEs). This has increased borrowing costs, particu- larly for SMEs, prompting shorter-term loan structures and greater reliance on local financing like Savings and Credit Co-operative Organisations (SACCOs). 1.2 Impact of Global Conflicts Global conflicts – particularly the Russia–Ukraine war and instability in the Middle East – have indirectly affected Kenya’s loan market by increasing fuel and food import costs, disrupting supply chains, and add- ing pressure on the Kenyan shilling. The currency has been volatile, with depreciation during 2022–23 fol- lowed by some recovery in 2024–25, while inflation has remained above the CBK’s 5% midpoint target, averaging around 5–6% in 2025. These pressures have raised borrowing costs and discouraged longer- term lending. Financial institutions have responded by tighten- ing credit terms to cushion against volatility. Banks increasingly include foreign exchange fluctuation clauses in loan contracts, and market reports indicate a trend towards shorter repayment periods in SME facilities. While these measures safeguard bank bal- ance sheets, they also increase repayment pressure on smaller businesses, especially in agriculture and retail. At the same time, local financing networks such as SACCOs and community-based savings groups (chamas) continue to absorb unmet credit demand. Microfinance activity has expanded, particularly in rural areas, helping to support liquidity and mitigate exclusion, although these sources cannot fully match the scale of formal bank financing. The loan market is therefore characterised by greater caution, shorter horizons and growing reliance on local capital pools. 1.3 The High-Yield Market Kenya’s high-yield market has become an important complement to bank financing, as both government and corporate issuers turn to bonds and structured instruments to raise capital in an elevated interest rate environment. With the Central Bank Rate at 9.50% as of August 2025, treasury and infrastructure bonds
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