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Banks charge premiums of up to 16.57pc in new loan pricing
CBK does not approve banks’ premium rates, which are denoted as K, in the new pricing framework, but lenders are still obligated to furnish the apex bank with the price point after approvals by their respective boards.
Banks are charging a premium of up to 16.57 percent on personal loans before fees and other charges, revealing a wide gap in how lenders determine factors like costs and customer risks amid a change in the pricing formula.
The average premium applied to personal loans ranges between 4.11 percent and 16.57 percent, a difference of 12.46 percentage points as per an analysis of current data published on the total cost of credit website.
Banks transitioned fully to the new pricing framework at the end of February 2026 and have been obligated to adopt either the Central Bank Rate (CBR) or the Kenya Shilling Overnight Interbank Average (Kesonia) as the benchmark for pricing loans.
Lenders previously lacked a uniform benchmark with each institution applying its own internal base rate.
Lenders with highest mark-ups include I&M Bank (16.57 percent), NCBA (16.34 percent), Stanbic (16.14 percent) and M-Oriental Bank (15.2 percent). The five lenders also have the highest interest rates on personal loans after the addition of the selected benchmark rate.
I&M Bank’s total interest cost excluding fees (base+premium) rises to 25.32 percent, 25.09 percent for NCBA, 24.87 for Stanbic Bank and 23.95 percent for M-Oriental Bank.
Kenya Bankers Association (KBA), the banking sector lobby which runs the cost of credit website alongside Central Bank of Kenya (CBK), says the wide spread in bank premiums was expected as lenders began reviewing individual borrower risk profiles.
“The expectation wasn’t that this spread would narrow immediately as banks would take time unbundling their customers as they apportion each customer a specific risk rating,” said Dr Samuel Tiriongo, the Head of Research at KBA.
“For some customers, this means that the risk assessment might have gone up. The reason we argued for flexibility in the premium K was so that banks can accommodate all customers and not shun some borrowers.”
CBK does not approve banks’ premium rates, which are denoted as K, in the new pricing framework, but lenders are still obligated to furnish the apex bank with the price point after approvals by their respective boards.
Banks are also allowed to define the components making up the premium which may include the lender's operating costs related to lending, return to shareholders and the borrower's risk premium.
Both applicable benchmarks, Kesonia and the CBR are closely aligned following recent modifications to the monetary policy transmission by the CBK.
Kesonia does not differ by much from CBR following the introduction of an interest rate corridor which ensures the overnight bank rate closely tracks the CBK benchmark.
The interest rate corridor was initially set at 2.5 percent above or below the CBR before being progressively reduced to the current 0.5 percent.
CBK has previously indicated that it expects the new pricing framework to reduce pricing differences between banks’ lending and deposit rates while improving transparency.
CBK also expects banks to quickly mirror the direction of interest rates as set by the CBR where a cut in the rate would yield lower interest costs for borrowers while a rise would mean costlier loans.
“Short term interest rates and commercial banks’ lending rates have declined, in line with the recent reductions in the Central Bank rate,” CBK Governor Kamau Thugge said earlier this month.
“The introduction of the risk-based credit pricing framework is expected to reduce the spread between the average commercial banks’ lending rates and deposit rates by enhancing transparency in loan pricing.”
Average commercial banks interest rates fell to 14.66 percent in March 2026, falling from a peak of 17.22 percent in November 2024.
Commercial banks have previously been fingered for being slow to reduce their lending costs despite sharp cuts to the CBR in the past two years, attracting the wrath of the CBK where Governor Kamau Thugge asked the lenders to end excuses for failing to reduce borrowing costs in September last year.
Banks on their part had cited hurdles to interest rate cuts before the revamp of the risk-based pricing model including the lack of a uniform benchmark and the poor development of the previous risk-based model.
Banks began implementing the new pricing framework on loans issued after December 1,2025 before transitioning existing facilities to the model at the end of February 2026.
The total cost of credit for borrowers is arrived at by adding the chosen benchmark (CBR or Kesonia) to the premium, denoted as K and fees and other charges.
The fees may include loan origination, arrangement, commitment, default and late payment fees.
The fees and other charges are applied separately but must be disclosed to the customers and the CBK.
