Grace Ashiru
The Central Bank of Kenya (CBK) has revamped the pricing structure for credit in commercial banks, implementing a revised risk-based model that will link lending rates to a newly introduced interbank benchmark. This change aims to improve transparency and enhance the transmission of monetary policy decisions.
Starting September 1, interest on new loans will be based on the Kenya Shilling Overnight Interbank Average (KESONIA), which is a renamed version of the overnight interbank rate that reflects actual transactions between banks. Existing loans will transition to this new system by February 2026, following a six-month adjustment period.
Under the new framework, banks will be mandated to publish the average lending rates and associated fees for each of their products on their websites, as well as on the CBK’s Total Cost of Credit portal. The regulator hopes this will put an end to opaque pricing practices by compelling lenders to clearly differentiate between the benchmark rate and their own risk premiums and fees.
The new pricing formula sets the lending rate as KESONIA plus a margin, “K”, which covers the bank’s cost of funds, returns to shareholders, and the borrower’s risk profile. In addition to the interest rate, the overall cost of credit will include fees such as processing and commitment charges.
KESONIA will be applicable to all variable-rate loans, with the exception of foreign currency-denominated loans and fixed-rate loans. If KESONIA is not feasible, customers may instead use the Central Bank Rate (CBR) as an alternative reference rate, according to a memo released by CBK on Tuesday.
This reform follows several months of friction between the CBK and commercial banks. When the proposal was first introduced in April, lenders expressed concern, arguing that strict rules might distort the market. The Kenya Bankers Association warned that the approach could limit how banks assess and price risk.
In response to this opposition, the adoption of KESONIA aims to address the concerns raised. By linking credit pricing to a transaction-based benchmark—similar to the UK’s SONIA and the US’s SOFR—the CBK hopes to create a transparent anchor rate, while allowing banks the flexibility to set borrower-specific premiums based on individual risk profiles.
The new system could have varying effects. Borrowers with stronger credit profiles may benefit from a clearer differentiation in risk, while those with weaker credit histories could face higher borrowing costs. Despite these potential disparities, the CBK aims to improve the transmission of monetary policy, which has historically been weak in Kenya. Changes in the central bank rate have not always been effectively reflected in the broader economy, and the new model is intended to address this issue.
CBK’s decision to overhaul the credit pricing structure is also a response to frustrations over the banking sector’s reluctance to reduce interest rates, despite multiple cuts to the benchmark lending rate since October 2024. The first test of the new system will come in September when banks begin offering new loans under the revised framework. How they disclose and justify the “K” premium will determine whether the new model fulfills the CBK’s promise of fairer and more transparent lending practices.
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