GACHAGA: Why scrapping risk-based pricing could be a blow to borrowers

I still remember the chaos in boardrooms and hushed hallway conversations back in 2016 when Parliament dropped the mic with an amendment to Section 33 of the Banking Act, introducing interest rate caps. It was pitched as the long-awaited antidote to what many saw as cartel-like behaviour in the banking sector. Finally, a leash on rogue lenders.

Then came 2019, and the tables turned. In classic political theatre, President Uhuru Kenyatta refused to sign off the budget unless the caps were scrapped. Spoiler alert: it worked. The caps were ditched, and in came risk-based pricing, a shiny new model meant to usher in credit fairness. Banks would now assess how risky you were and price your loan accordingly. Sensible, right?

Well, fast-forward to July 20, 2025, and the plug’s been pulled. Risk-based pricing is officially out. What are we back to? A system that smells a lot like the one we tried to escape in the first place.

So what’s the big deal?

Risk-based pricing was the banking world’s version of “earn your stripes.” If you had a good credit history, regular income and paid your loans on time, you would get better terms. If your finances were shakier, say you ran a small seasonal business or had no credit record, your rate would be higher, but there was logic to it. A formula.

It gave banks room to price in risk and, more importantly, it allowed for differentiation. Not everyone had to pay the same old blanket 18 per cent just because that is what the banks had always charged.

It was a step, however imperfect, toward financial inclusion. More SMEs could get onboarded. There was some incentive for borrowers to maintain good credit behaviour. But now? CBK says, “Scrap that.” The rationale? The system, they argue, was not reflecting the true cost of lending. Apparently, it was not grounded in current economic realities.

The replacement? A good old formula: start with the interbank rate, add a “K” factor (the banks’ internal lending costs and then tack on a margin for good measure). Voilà, your interest rate. So essentially, we are back where we started. Only this time, the government’s borrowing appetite is bigger and the T-bill rates are higher.

And why does this matter?

When Treasury bill (T-bill) rates are high, it means the government is offering attractive, risk-free returns to investors. Banks, being rational players, would rather lend to the government than to you or your SME, because it’s safer and just as profitable if not more. So, if you are a borrower, your bank now must price your loan high enough to compete with what it could earn from T-bills. That becomes the new "floor" for interest rates. In short: when the government borrows more at higher rates, everyone else pays the price, literally.

What’s the way forward? Well, we cannot just complain (although I do it with great talent). We need to be smarter as borrowers.

One, negotiate. Yes, you can ask your bank what's inside that mysterious "K" they tack onto your loan rate, most will not tell you, but the brave few might. Some banks will consider your loyalty, your good repayment history, or your business size and adjust the “K”. Don’t just sit there nodding at the loan officer. Ask. Challenge. Smile, but ask.

Two, shop around. There’s no law saying you must bank where your grandmother opened her account. Saccos, microfinance institutions and digital lenders (the credible ones, not the “send 2k now and we will approve your 50k” type) can offer surprisingly good rates. You will need to do your homework, though. Compare effective annual rates, not just the headline numbers. And please, for your own financial sanity, Fuliza is not a financial strategy. It’s a bad habit dressed up in convenience.

Three, consider group financing. Never underestimate the power of chamas and business groups. Banks are far more likely to negotiate favourable terms when they are looking at a group with pooled savings, shared collateral or a project with real economic value. Think land deals, real estate projects, agri-business clusters. Even if you are borrowing as an individual, being part of a strong collective gives you leverage, pun fully intended.

Four, understand your credit report. Your CRB score is like your financial CV. Know it. Monitor it. Challenge it when it’s wrong. While risk-based pricing is on pause, having a clean credit report still helps with faster approvals, higher limits and protection from fraud. CRB Kenya has made strides, there are now tools to check and manage your report online. Use them. Think of it as hygiene for your wallet.

Five, it’s a global village. Just because your bank charges 19 per cent does not mean that’s the only option on earth. If you are running a cross-border business or have some assets offshore, explore borrowing abroad. USD-denominated loans and structured credit lines are a thing. And if you have been reading my column long enough, you know the playbook: the wealthy do not borrow because they are in trouble—they borrow to build. You should too

Final thought: Borrowing is not evil, but this system might be. I’m all for paying fair interest. I have worked in compliance and risk long enough to know banks are not charities. But what we need is transparency, accountability and fairness. So dear borrower, read your loan agreements. Ask questions. Do not get dazzled by quick approvals or shiny banking apps. Because at the end of the day, the bank will always protect its margins. It’s up to you to protect your wallet.

Compliance, risk and fintech executive