Banks must embrace crediting rating to fairly price loans – report

Capital Markets Authority CEO Wyckliffe Shamiah with Agusto & Co CEO Yinka Adelekan during a forum in Nairobi /HANDOUT

Borrowers will have a clear picture of the total cost of credit if the country’s financial sector embraces the new framework for pricing commercial bank loans introduced by the Central Bank in August, according to continental credit rating firm Agusto.

CBK has proposed a new credit rating alongside the Kenya Shilling Overnight Interbank Average (Kesonia),

Agusto & Co. said this at a press briefing in Nairobi, observing that while Kesonia promotes greater transparency in credit pricing, lenders are still not clear on how they rate borrowers’ risk.

The call by the credit rating firm is coming a day after the banking regulator revealed that borrowers are still paying heavily for credit despite the reduced benchmark rate.

According to CBK, Kenya’s bank lending spread has widened to a multi-year high despite the CBK cut to 9.25 per cent.

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, leaving borrowers and savers worse off despite falling policy rates.

For borrowers, the average loan interest rate is still high at 15.07 per cent, while for savers, the average deposit rate is at a moderate 7.63 per cent.

The regulator, CBK, has been cutting the Central Bank Rate (CBR) to make borrowing cheaper and stimulate the economy by reducing the rate from 13 per cent to the current 9.25 per cent.

However, lenders have responded unevenly to CBK’s rate cuts. The lending rates have eased by just 1.77 percentage points between August last year and September this year, 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 per cent 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 moved quickly to cut what they pay depositors, a trend that reflects profit protection in the sector.

“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,’’ Agusto & Co CEO, Yinka Adelekan said.

Adelekan said Kenya needs to strengthen credit transparency, which means moving from collateral-based lending toward data-driven credit evaluation in an effort 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.

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." 

“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.