Browse definitions of important terms
Annual Percentage Rate or APR is the numerical representation of the Total Cost of Credit or TCC. The TCC will include the bank interest rate based on the Kenya Banks Reference Rate (KBRR) plus the premium (known as “k“). Third Party Costs directly associated with the loan are covered in the TCC disclosure; these include legal fees, insurance, valuation and government levies.
Bank means a company which carries on, or proposes to carry on, banking business in Kenya but does not include the Central Bank
“Central Bank Rate” (CBR) is a monetary tool that the Central Bank of Kenya (CBK) uses to signal to the market the direction in which the cost of money should go. Banks include the CBR/KESONIA and other factors when calculating their deposit and loan rates. Therefore, the CBR is not an exclusive factor that influences rates.
A calculation where accumulated interest is added back to the principle amount. Interest is then earned from the compounded amount.
A binding agreement between a bank and a customer. It should include terms and conditions of the agreement, including responsibilities of each party.
“Credit Reference Bureaus” (CRB) is an entity licensed by CBK to prepare or provide credit reports to credit information recipients based on data maintained by the Bureau and to carry out such other activities as are authorized under these CRB Regulations.
“Credit Risk” is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the bank or if an obligor otherwise fails to perform as agreed.
“Credit Scoring” is a numerical assessment of an individual consumer's creditworthiness, typically ranging from 0-1000. It is calculated using logistic regression models that analyze personal credit history factors like payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries.
“Debt” refers to a credit or an advance extended by a lender to their customer on loan-based terms.
“Digital channel” means the internet, mobile devices, computer devices, applications and any other digital systems as maybe prescribed by the bank.
“Digital credit” means a credit facility or arrangement where money is lent or borrowed through a digital channel. Key features include small loan amounts, short loan tenor, remote or self-initiated access, fast processing and disbursement.
“Fees and charges” refer to any amounts payable by a customer to a bank/microfinance bank in connection with a loan or credit facility, excluding the principal and interest. These may include, but are not limited to, processing fees, service fees, appraisal or valuation fees, legal fees, insurance premiums (where applicable), late payment penalties, and other administrative or transactional costs.
“Interest” is a fee that a bank will charge to loan you money.
“Kenya Shilling Overnight Interbank Average (KESONIA)” is a transaction-based benchmark rate that reflects the average interest rate at which banks in Kenya lend and borrow unsecured overnight funds in Kenya Shillings. The CBK serves as the official administrator of KESONIA.
“Microfinance bank” means a company which is licensed to carry on microfinance bank business, and includes all branches, marketing units, outlets, offices and any other place of business that may be licensed by CBK.
“Mortgage” refers to secured loan provided exclusively for the purchase or improvement of housing, usually over a period of at least five years.
“Premium” (“K”) refers to the additional percentage added to the reference rate (Central Bank Rate/KESONIA) to determine a bank lending rate. It reflects the bank’s operating costs related to lending, the expected return to shareholders, and a risk margin based on the borrower’s credit profile.
Reference Rate is a benchmark interest rate used as a reference for pricing bank financial products, such as loans. For this purpose, the reference rate could KESONIA or CBR.
“Repayment Schedule” details the periodic amount to be paid by the borrower and a split of the periodic payments into principal and interest components. The repayment schedule also shows a borrower the total amount to be repaid for the specific principal amount borrowed.
“Riba” is an Islamic Banking term to define Interest. Islamic banking is not based on pricing money and earning interest, but it is a system of trade where goods and services are sold, and capital is invested by taking risks to earn Halal profits. Interest free banking is a subset of the Islamic banking concept
Secured loan is a loan that is backed by collateral, such as property, a vehicle, or other assets. If the borrower fails to repay the loan as agreed, the lender may recover the outstanding amount by taking and selling the pledged asset.
“Shari’ah-Compliant Banking Products” are financial products that operate in accordance with Islamic law (Shari’ah) and principles.
“Total Cost of Credit” a list of all costs incurred in borrowing and servicing a loan. It includes interest expenses, bank fees and charges, and third-party fees and charges. The total cost of credit = KESONIA/CBR + Premium (K) + Fees and Charges
“Unsecured Loan” is a loan that does not require collateral. Approval is based on the borrower’s creditworthiness and ability to repay.