The Transition to Risk-Based Lending In Kenya: A New Frontier For Credit Access As CBK Approves All 38 Banks

Risk-based lending has become a central theme in Kenya’s financial sector, especially following the repeal of the interest rate cap in 2019. The cap, which had previously stifled banks’ ability to adjust lending rates based on borrower risk, is now being replaced by a more nuanced system. The Central Bank of Kenya (CBK), in collaboration with commercial banks, has been at the forefront of implementing this model to enhance credit access for various types of borrowers.

Risk-based lending allows banks to tailor interest rates to the perceived risk of each borrower, offering higher rates to riskier individuals or businesses and lower rates to those deemed more creditworthy. This system differs from the one-size-fits-all interest rates imposed by the interest rate cap law, which often led to a credit freeze for individuals with less-than-stellar credit histories. By aligning interest rates with risk, banks can better manage their loan books and accommodate a wider range of borrowers.

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Historically, the shift toward risk-based pricing has been gradual and faced several challenges. Many banks were initially slow to adopt this model, with only six out of 38 banks receiving approval from the CBK by 2021. However, over time, more institutions joined, with 33 banks now cleared to roll out their risk-based loan pricing models.

Despite this progress, full implementation has been hampered by concerns from both financial institutions and borrowers. Some banks have delayed implementing the model due to fears of losing competitive advantage—those who raise interest rates to accommodate risk may lose customers to banks that haven’t made such adjustments.

CBK’s role in this process is critical. The regulator has been responsible for reviewing the pricing models of individual banks to ensure that they are aligned with the broader goals of financial inclusion and consumer protection. CBK’s Banking Sector Charter is at the heart of these reforms, emphasizing transparency, fairness, and ethical banking practices. The charter also seeks to reward disciplined borrowers with lower interest rates, thereby incentivizing responsible credit behavior.

One major benefit of risk-based lending is that it offers a lifeline to borrowers previously excluded from formal credit due to their perceived high risk. Small businesses, informal sector workers, and individuals without traditional credit histories can now access loans, albeit at higher interest rates. This, in turn, may drive economic growth by enabling more people to participate in the formal credit market.

However, critics argue that risk-based lending may entrench inequality. Those with poor credit histories or unstable income streams—often the most vulnerable in society—are likely to face higher borrowing costs. This could exacerbate the divide between the financially privileged and the underserved, as those with wealth and strong credit histories secure lower rates while the rest bear the brunt of higher costs. Some critics on social media have likened this system to a form of economic classism.

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Despite these concerns, the CBK has committed to ensuring that risk-based pricing is implemented in a manner that promotes fairness. The governor of the CBK, has emphasized that the goal is to ensure the models used by banks are realistic and do not exploit borrowers. This involves setting clear guidelines for how banks assess risk and price loans, ensuring that interest rates reflect not just the borrower’s risk but also the cost of funds and operational expenses.

Moving forward, the future of lending in Kenya under this model is expected to evolve as more banks fully transition to risk-based pricing. This transition is likely to create a more dynamic and competitive lending environment. As banks adjust to this new reality, there is potential for significant growth in private sector credit, which has been constrained for years by both the interest cap and the cautious lending strategies adopted during the COVID-19 pandemic [oai_citation:2,Bankers urge CBK to fast-track shift to risk-based loan pricing.

The broader implications for the economy are significant. As banks become more comfortable lending to riskier borrowers, sectors that have traditionally struggled to access credit—such as agriculture, manufacturing, and informal trade—could see an influx of capital. This would, in turn, stimulate economic activity and job creation [oai_citation:1,Bankers urge CBK to fast-track shift to risk-based loan pricing.

Therefore, while risk-based lending presents opportunities for greater financial inclusion, it also poses challenges that require careful management. The CBK’s role as a regulator will be key in ensuring that this model benefits all Kenyans, not just the wealthy. As more banks roll out their risk-based pricing models, it will be crucial to monitor how this system impacts both borrowers and the broader economy. The future of lending in Kenya hinges on striking the right balance between risk management and financial access.

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