The Central Bank of Kenya (CBK) has unveiled a new loan-pricing framework that will see the Kenya Shilling Overnight Interbank Average (KESONIA) replace opaque internal benchmarks as the reference rate for all variable-rate loans. The shift, which takes effect on September 1, 2025 for new facilities, is one of the most significant reforms in Kenya’s credit market in over a decade.
Transparency
KESONIA reflects the weighted average of overnight interbank lending rates, offering a transparent benchmark that closely tracks the CBK’s policy stance through the Central Bank Rate (CBR). Unlike past regimes, where banks set their own internal base rates, borrowers will now see a uniform starting point for loan pricing.
CBK Governor Kamau Thugge described the change as “a decisive step toward fair, predictable, and risk-sensitive credit pricing.” Banks will be required to disclose their lending formulae, breaking down KESONIA + premium (“K”) + fees and charges, with the results published monthly on the CBK’s Total Cost of Credit portal.
Impact
For borrowers, the immediate impact will be greater clarity and faster transmission of monetary policy decisions. Interest rates on variable loans will adjust more quickly when the CBK changes the CBR, reducing the lag that previously existed, especially in the digital lending space.
Consumers with good credit histories may see benefits under the risk-based model, as lenders compete to offer lower premiums. However, weaker borrowers could face slightly higher rates as banks price in credit risk more explicitly.
The reform also abolishes preferential loan rates for bank employees, ensuring that the model applies universally to all borrowers.
Transition
• New variable-rate loans will adopt KESONIA from September 1, 2025.
• Existing loans will transition gradually over six months, with a deadline of February 28, 2026.
• Fixed-rate and foreign-currency loans are exempt, while in the absence of sufficient interbank activity, banks may temporarily fall back on the CBR.
Commercial banks have endorsed the move, with the Kenya Bankers Association calling it “a balanced model that enhances market efficiency while safeguarding financial stability.”
The shift comes against a backdrop of monetary easing. The CBK has cut the CBR twice this year, from 10.0% in April to 9.5% in August 2025, in an effort to stimulate credit uptake amid subdued private sector borrowing. By linking loan pricing directly to interbank conditions, the regulator hopes to ensure these policy signals translate more rapidly into household and business lending.
Risks
Analysts warn that while transparency is a welcome development, the success of the model depends on discipline in risk-based pricing and robust consumer protection. If banks overprice the “K” premium, the benefits could be eroded. Conversely, underpricing could encourage excessive risk-taking.
Consumer advocates have also urged the CBK to strengthen monitoring, particularly in mobile lending, where borrowers face the highest charges.
The new loan-pricing model signals a more competitive and transparent era for Kenya’s credit market. Borrowers will need to pay closer attention to their creditworthiness, while banks must balance profitability with fairness. Ultimately, the reform could deepen financial inclusion, provided its rollout is carefully managed.
