Credit pricing checks to change loan pacts

The Central Bank of Kenya's deadline for migrating every existing variable-rate loan onto its revised risk-based pricing model fell on February 28. What has followed matters more than the deadline itself.

Banks had priced loans off their own internal base rates since 2019, when the model was first introduced. A CBK review found compliance so patchy that comparing one bank’s pricing to another’s was nearly impossible. The regulator has since said, in terms it has not used lightly, that the rebuilt system will be watched far more closely than the one it replaced. For the country’s corporate borrowers, that shift marks the practical end of relationship-driven credit pricing.

The mechanics are specific. New variable-rate loans have been priced since September 2025 against the Kenya Shilling Overnight Interbank Average (KESONIA), plus a bank-specific premium “K”. That premium is not a single discretionary figure a relationship manager can quietly adjust. CBK’s framework requires three components: the bank’s cost of doing business, the return demanded by its shareholders, and a credit risk premium.

That risk premium must reflect the individual borrower’s probability of default, repayment history and quality of security. Every bank must publish its weighted average lending rate and the composition of its K premium each month on the Total Cost of Credit website, and report the same directly to the regulator.

This is not a paper exercise. CBK began on-site inspections of banks roughly six months before the revised model was even published. The goal was to check whether rate cuts were reaching customers in line with the pricing models each bank had agreed with the regulator. Governor Kamau Thugge’s own account of those findings was blunt: the results were disappointing. Some banks were not even following the models they had submitted. That finding is a large part of why the entire system was rebuilt. CBK has said it is still working out what penalties non-compliant banks should face. Earlier guidance on lending-rule breaches set a ceiling of up to three times a bank's annual profits.

For decades, large domestic and multinational corporates could expect pricing to reflect more than their financials. A long relationship with a bank’s leadership, group cross-selling potential, or sheer brand weight could shave meaningful basis points off a facility, largely at a relationship manager’s discretion. That discretion has not vanished, but it has been narrowed and made visible.

The K premium must now be defensible against a borrower’s actual, documented risk profile. Banks must also be able to show CBK that their published rates track the model their boards approved. A preferential rate that cannot be traced to the borrower’s risk metrics is precisely the kind of gap CBK’s inspection regime now exists to find.

This has direct consequences for how corporate debt gets documented. Facility letters and credit agreements drafted around a static, negotiated base rate now sit awkwardly against the new regime. CBK publishes and compounds the reference rate daily. Banks must re-disclose their premium every month. Corporate legal teams handling facilities migrated onto the new model ahead of the February deadline should be reviewing their documentation now. Where it is missing, they should be inserting clearer rate-reset mechanics, explicit language on how a change in KESONIA or a bank-initiated revision to K passes through to the borrower, and covenant drafting that treats the borrower’s own leverage, repayment history and governance quality as directly price-relevant terms. For lawyers advising on acquisition financing, refinancing or syndicated facilities, this is a live drafting issue.