The Central Bank of Kenya ushered in a new era of loan pricing in September 2025, replacing the long-standing Central Bank Rate with the Kenya Shilling Overnight Interbank Average — known as KESONIA — as the foundational benchmark for variable-rate shilling loans. The shift, which took effect on 1 September 2025, marks one of the most significant reforms to Kenya’s credit market in recent years and places the country alongside advanced economies that have already moved to overnight interbank rates as their primary lending benchmarks.
Under the revised Risk-Based Credit Pricing Model introduced by the regulator, commercial bank lending rates are now calculated as KESONIA plus a premium that accounts for each institution’s operating costs, expected shareholder return, and the individual borrower’s risk profile. The structure mirrors frameworks adopted in major global markets, including the United Kingdom, which uses the Sterling Overnight Index Average (SONIA), and the United States, which transitioned to the Secured Overnight Financing Rate (SOFR) after phasing out LIBOR. The approach is designed to make loan pricing more transparent and directly responsive to real market liquidity conditions rather than to a rate set solely by the regulator.
Borrowers who held existing variable-rate shilling loans before the September 2025 cutoff were given time to adjust. The Central Bank mandated that all such loans complete their transition to KESONIA-linked pricing by 28 February 2026, giving both lenders and customers roughly six months to recalibrate agreements, update internal systems, and communicate revised repayment terms. Financial institutions were required to notify affected customers directly and to explain clearly how their monthly obligations would change under the new formula.
Kenya’s financial sector has undergone a series of transformative reforms over the past decade. The country experimented with statutory interest rate caps between 2016 and 2019, a period that saw banks tighten credit to small businesses and individuals deemed higher risk, effectively freezing many Kenyans out of formal credit markets. The removal of those caps paved the way for the risk-based pricing model now being refined with KESONIA at its core. By anchoring lending rates to an overnight interbank rate rather than a central bank policy rate, the Central Bank aims to create a more dynamic and accurate reflection of daily liquidity conditions across the Kenyan banking system.
For Kenyan borrowers — from households managing personal loans to businesses servicing large credit facilities — the transition to KESONIA introduces a degree of rate variability that was less pronounced under CBR-linked pricing. As the interbank rate shifts with market liquidity, monthly repayments on variable-rate facilities may fluctuate accordingly. Analysts suggest that over time the reform should improve credit allocation efficiency, encourage banks to price individual risk more precisely, and deepen Kenya’s capital markets. The Central Bank has signalled it will closely monitor the rollout and stands ready to intervene where necessary to ensure the transition strengthens rather than disrupts broader economic stability.
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