Enhancing Credit Transparency in Kenya
Borrowers could gain a clearer understanding of the total cost of credit if Kenya’s financial sector adopts a new framework for pricing commercial bank loans introduced by the Central Bank in August, according to Agusto, a continental credit rating firm. The Central Bank has proposed a new credit rating alongside the Kenya Shilling Overnight Interbank Average (Kesonia), which aims to promote greater transparency in credit pricing. However, lenders still face challenges in accurately assessing borrowers’ risk.
This call for improved transparency comes after the banking regulator revealed that borrowers are still paying heavily for credit despite the reduced benchmark rate. According to the Central Bank of Kenya (CBK), the country’s bank lending spread has widened to a multi-year high, even though the CBK has cut the benchmark rate to 9.25 percent.
Widening Lending Spread
The gap between what banks charge for loans and what they pay for savings is currently at a nine-year high of more than seven percentage points. This leaves both borrowers and savers worse off, despite falling policy rates. For borrowers, the average loan interest rate remains high at 15.07 percent, while for savers, the average deposit rate is at a moderate 7.63 percent.
The regulator, CBK, has been reducing the Central Bank Rate (CBR) to make borrowing cheaper and stimulate the economy. The rate has been cut from 13 percent to the current 9.25 percent. However, lenders have responded unevenly to these rate cuts. Between August last year and September this year, lending rates have eased by just 1.77 percentage points, while deposit rates have fallen by 3.65 percentage points in the same period.
This is the highest spread since August 2016, when the gap reached 11.29 percent just before Kenya introduced lending caps to mitigate the cost of credit. The widening gap suggests that banks have been slow to pass on lower interest rates to borrowers, even as they quickly cut what they pay depositors. This trend reflects profit protection in the sector.
Moving Toward Data-Driven Credit Evaluation
“While this shift aligns Kenya with international best practices, including benchmarks like the UK Sterling Overnight Index Average (SONIA) and the US Secured Overnight Financing Rate (SOFR), which are derived from real-time market transactions, determination of Premium (“K”) wobbles in a grey area,” said Yinka Adelekan, CEO of Agusto & Co.
Adelekan emphasized that Kenya needs to strengthen credit transparency, which means moving from collateral-based lending toward data-driven credit evaluation to complement Kesonia. Establishing a credible credit rating culture allows financial institutions to clearly determine the credit risk premium. Banks must have internal credit scoring models to appraise counterparty risks.
According to her, this will lay the foundation for a more efficient, transparent, and risk-sensitive financial system, ultimately improving monetary policy transmission and supporting the development of a deeper, more responsive capital market.
International Examples and Implementation Timeline
She gave an example of the UK, where banks are required to publish their weighted average premium (k) to allow for customer comparison. In Kenya, banks have three months to develop their internal risk-based pricing models, secure board approval, and submit to CBK, followed by a three-month transition to 28th February 2026.
“Ratings make borrower risk visible and comparable. In addition, I would recommend guarantee institutions that bridge confidence gaps for sectors like SMEs and agribusiness,” she added. “Together, these tools ensure that credit decisions are based on real financial behaviour, not just relationships or asset ownership, creating a more transparent and inclusive marketplace.”
The credit rating firm said that this would bring transparency and credibility to the pricing of risk, allowing investors to make informed decisions and encouraging participation from both local and foreign institutions.