Starting December 1, 2025, borrowers at Equity Bank will begin to experience the full impact of a major shift in how their loans are priced. This change is not unique to Equity; it stems from the Central Bank of Kenya’s (CBK) Revised Risk-Based Credit Pricing Model (RBCPM), which mandates all commercial banks to adopt a new, market-driven, and highly personalized approach to calculating interest rates.
This detailed blog post breaks down the new model, its components, and what it means for your borrowing costs.
The Core of the Change: From CBR to KESONIA
The most fundamental change in the new framework is the replacement of the familiar Central Bank Rate (CBR) as the primary reference for pricing variable-rate loans.
➡️ The New Benchmark: KESONIA
The new system anchors the lending rate to the Kenya Shilling Overnight Interbank Average (KESONIA).
- What is KESONIA? KESONIA is the daily average interest rate at which commercial banks lend to each other overnight. It is a real-time, transaction-based rate that reflects the actual liquidity and cost of funds in the market.
- Why the change? The move to KESONIA aligns Kenya with international best practices (like the US SOFR and UK SONIA), aiming to strengthen the transmission of monetary policy and make the cost of credit more responsive to market conditions.
⚖️ The New Loan Pricing Formula
Under the revised RBCPM, the total lending rate for variable-rate loans will be calculated using a simple, transparent formula:
{Total Lending Rate} = {KESONIA} + {Premium (“K”)}
The Total Cost of Credit (TCC) for the borrower will then be:
{Total Cost of Credit} = {KESONIA} + {Premium (“K”)} + {Fees and Charges}
Equity Bank, like other lenders, must now structure its loans around this model.
The Critical Component: Premium (“K”)
The “Premium” or “K” component is where Equity Bank’s specific internal model and your individual risk profile come into play. It is the factor that differentiates the rate you pay from the base KESONIA rate.
The “K” premium is comprised of three main elements:
- Bank’s Operating Costs: This covers Equity’s administrative expenses, such as salaries, maintenance, and other overheads related to the lending business.
- Return to Shareholders: The expected profit margin Equity must achieve for its investors from the lending activity.
- Borrower’s Risk Premium: This is the most crucial, and personalized, element. It is the compensation Equity expects based on your likelihood of defaulting on the loan.
🎯 Your Risk Profile: The Game Changer
The new model heavily emphasizes the Borrower’s Risk Premium, making your credit score the single most powerful factor determining your interest rate.
- Lower Risk, Lower Rate: Borrowers with a strong, consistent credit history, stable income, and sufficient collateral will be assigned a low-risk profile, resulting in a lower “K” premium and, therefore, a more affordable loan rate.
- Higher Risk, Higher Rate: Borrowers with a history of irregular repayments, a poor credit report, or those in volatile business sectors will be assigned a higher-risk profile. This will lead to a higher “K” premium and a more expensive loan.
Equity Bank is expected to use a detailed, sophisticated credit-scoring model to accurately assess this risk.
💡 Implications for Equity Bank Customers
The effective date of December 1, 2025, for new variable-rate loans marks a significant milestone. Here’s what Equity Bank’s existing and prospective borrowers should expect:
1. New Loans: Immediate Transparency and Volatility
For any new variable-rate loan facility taken out from December 1, 2025:
- Clearer Cost Breakdown: You will receive a clearer breakdown of your interest rate, explicitly showing the KESONIA rate, your personal “K” premium, and any fees/charges. This newfound transparency allows for easier comparison with other banks.
- Rate Fluctuation: Since KESONIA is a daily market rate, the interest rate on your loan may fluctuate more frequently than under the old CBR-based system, introducing an element of uncertainty in financial planning.
2. Existing Loans: The Migration Timeline
The CBK has set a transition period for existing variable-rate loans. All such facilities must migrate to the new KESONIA-based pricing model by February 28, 2026. Between now and that date, Equity will be preparing to update its entire loan portfolio.
3. Take Control of Your Credit
The emphasis on your individual risk profile means you have more control over your borrowing costs than ever before. To secure the lowest possible rate from Equity:
- Improve Your Credit Score: Ensure timely repayment of all existing credit facilities. A cleaner credit history directly translates to a lower risk premium.
- Shop Around: Use the mandatory disclosure information published by banks on the Total Cost of Credit (TCC) website to compare Equity’s “K” premium with its competitors.
The implementation of the CBK’s Revised Risk-Based Credit Pricing Model by Equity Bank signals a move towards a more transparent, competitive, and personalized credit market in Kenya.
You can learn more about the CBK’s decision to shift the base rate in this video: CBK approves new risk-based credit pricing model.