The Central Bank of Kenya (CBK) has unveiled a new framework for pricing commercial bank loans, requiring all variable-rate loans to be benchmarked against the Kenya Shilling Overnight Interbank Average (KESONIA).
In its statement, published on X, formerly Twitter, the CBK said KESONIA is a renamed version of the overnight interbank rate and will use the same method of calculation to show the cost of transactions between banks.
The revised model aims to strengthen monetary policy transmission, improve transparency, and secure risk-based lending.
From September 1, 2025, all new loans with changing interest rates will be based on KESONIA, a market rate tied to the Central Bank Rate (CBR). Old loans will move to KESONIA by February 2026.
The CBK also clarified that KESONIA applies to variable-rate loans except fixed-rate and foreign currency loans, with the CBR serving as an alternative where necessary.
“KESONIA will apply to all variable-rate loans except for foreign-currency-denominated loans and fixed-rate loans.” “ Where KESONIA is not practical, customers may avail of the use of the Central Bank Rate (CBR) as the alternative reference rate.”
Under the new model, lending rates will be set as KESONIA plus a Premium “K,” which covers funding costs, shareholder returns, and borrower risk factors. The Total Cost of Credit (TCC) will then add this lending rate to extra charges such as processing and commitment fees to show the full loan cost.
The regulator said the new name was chosen to give Kenya’s risk-free rate a clearer identity, mirroring global practice such as the UK’s Sterling Overnight Index Average (SONIA) and the US’s Secured Overnight Financing Rate (SOFR).
Banks will now be required to publish their weighted average lending rates on their websites and the Total Cost of Credit (TCC) platform to enhance transparency
The reforms follow months of tension between CBK and lenders, after the regulator criticised banks for failing to pass on the benefits of multiple benchmark rate cuts since 2024. The revised model, CBK said, was collated from inputs from shareholders, lenders, development partners, industry associations, and individuals.
In practice, this new model could curb banks’ flexibility in pricing loans and deliver clearer, more transparent loan costs for borrowers. Still, new borrowers will be more likely to incur higher costs, drawing from additional premiums that banks can apply to cover funding and risk.
