Kenya’s financial institutions must urgently adopt robust credit rating systems to ensure fairness and transparency in loan pricing, a new analysis by continental credit rating firm Agusto & Co has revealed.
The firm said the Central Bank of Kenya’s (CBK) new approach to determining lending rates through the Kenya Shilling Overnight Interbank Average (Kesonia) offers a major step forward, but warned that banks still lack clear methods for assessing the creditworthiness of their customers.
During a media briefing in Nairobi on Thursday, Agusto said that without proper credit rating models, the new framework will not achieve its intended goal of fair pricing for borrowers.
The call came shortly after CBK raised concerns that borrowers continue to bear a heavy credit burden even after policy rate cuts aimed at stimulating lending and economic growth.
CBK data shows that the gap between loan and deposit rates has widened sharply, reaching a nine-year high of over seven percentage points. This means banks are charging borrowers far more for credit while offering savers very little in return, despite a significant drop in the benchmark rate to 9.25 per cent.
The average interest on loans currently stands at 15.07 per cent, while deposits earn around 7.63 per cent. This imbalance persists even though CBK has reduced the Central Bank Rate from 13 per cent to 9.25 per cent since last year to encourage cheaper borrowing.
Despite the regulator’s efforts, lending institutions have not adjusted accordingly. Loan rates have dropped by only 1.77 percentage points since August last year, compared to a sharper 3.65 percentage point fall in deposit rates during the same period.
This marks the widest spread since 2016, when Kenya introduced lending rate caps to address the high cost of borrowing. Agusto & Co Chief Executive Officer Yinka Adelekan said that while the introduction of Kesonia aligns Kenya with global market practices such as the UK’s SONIA and the US’s SOFR, there remains uncertainty in how lenders determine their risk premium, referred to as “K”.
“While this shift aligns Kenya with international best practices, including benchmarks like SONIA and SOFR, determination of Premium (‘K’) wobbles in a grey area,” Adelekan said.
She added that Kenya’s financial sector must transition from collateral-based to data-driven credit evaluation to make lending more transparent and efficient. “Banks must develop internal credit scoring models to accurately assess risks and determine fair loan prices,” she said.
Adelekan noted that this will create a stronger and more responsive financial system, improve the effectiveness of monetary policy, and foster the growth of a well-functioning capital market.
