The Central Bank of Kenya (CBK) has unveiled a sweeping reform to how commercial banks price credit, introducing a new risk-based model that ties lending rates to an interbank benchmark. The initiative, effective from September 1, will see new loans priced against the Kenya Shilling Overnight Interbank Average (KESONIA), which reflects actual overnight transactions between banks. CBK said the reform is designed to boost transparency, enhance fairness in lending, and strengthen the transmission of monetary policy across the economy.
Transition to KESONIA-Based Lending
KESONIA replaces the previous overnight interbank rate but retains its focus on real transaction data between banks. The new model mandates that interest on all new variable rate loans will be linked to KESONIA from September, while existing loans will migrate by February 2026 after a six-month transition period. Exceptions are made for foreign currency-denominated loans and fixed-rate products, which will continue under current frameworks.
Transparency in Loan Pricing
A key pillar of the reform is transparency, with banks now required to publish the average lending rates and fees for each of their products both on their websites and on CBK’s Total Cost of Credit portal. This aims to end opaque pricing practices that have long frustrated borrowers, who often found it difficult to separate base rates from hidden fees and risk premiums. By clearly distinguishing the benchmark rate from additional margins and charges, the regulator hopes to create greater accountability across the sector.
The Formula Behind the Rates
Under the new system, lending rates will be calculated using the formula KESONIA plus a margin labeled “K.” This margin accounts for the bank’s cost of funds, the return required by shareholders, and the borrower’s individual risk profile. Additional fees, including processing and commitment charges, will also contribute to the total cost of credit, but they must be transparently disclosed.
Addressing Industry Pushback
The reforms come after months of tension between CBK and Kenya’s commercial banks, many of which had voiced concerns when the proposal first surfaced in April. Lenders warned that overly prescriptive rules could distort market dynamics and restrict their ability to assess risk effectively. The Kenya Bankers Association argued that imposing such a system could lead to inefficiencies and limit competition among financial institutions.
Regulator’s Response Through Market Anchoring
By adopting KESONIA, CBK has responded with a transaction-based benchmark similar to those used internationally, such as SONIA in the UK and SOFR in the US. This approach gives the regulator a transparent and credible anchor for interest rates, while still leaving room for banks to apply borrower-specific risk premiums. The balance is intended to create fairer lending conditions without undermining the autonomy of banks to price loans according to risk.
Potential Impact on Borrowers
The impact of the new model will vary across borrower segments, with stronger credit profiles likely benefiting from more competitive rates under clearer risk differentiation. Conversely, borrowers with weaker financial positions could face higher costs as risk premiums become more explicit. Despite this, CBK argues that the reforms will ultimately create a fairer system and ensure that changes in the central bank’s policy rate more effectively influence lending conditions across the economy.
Tackling Weak Policy Transmission
For years, Kenya’s monetary policy has struggled with weak transmission, as reductions in the Central Bank Rate (CBR) often failed to translate into lower lending rates for businesses and households. CBK has repeatedly voiced frustration at commercial banks’ reluctance to cut interest charges despite multiple reductions in the benchmark lending rate since October 2024. By anchoring loan pricing to KESONIA, the regulator hopes to close this gap and make monetary policy more impactful.
The rollout of the KESONIA-based model represents one of the most significant overhauls of Kenya’s credit market in recent years. Beginning in September, banks will be tested on how effectively they disclose and justify their margins under the new system, providing the first glimpse of whether CBK’s promise of fairer, more transparent lending is realized. If successful, the reform could mark a turning point in aligning Kenya’s credit system with global standards while empowering borrowers with clearer, more predictable pricing.