A New Pricing Model: Kenya’s Banks Now Tie Variable Loans to KESONIA

The Central Bank of Kenya’s revised credit-pricing framework is changing how banks calculate variable-rate loans, with KESONIA now serving as the common reference rate and the borrower’s risk, bank costs and fees making up the rest of the price.

The revised Risk-Based Credit Pricing Model became fully operational in March 2026. CBK says the model is designed to improve the transmission of monetary policy into lending rates, make loan pricing more transparent and encourage responsible lending.

What changed?

Under the revised model, a bank’s lending rate for a variable-rate loan is built from KESONIA plus a premium known as “K”. The premium captures the costs of lending, the return expected by shareholders, the borrower’s credit risk and other relevant costs.

The total cost of credit also includes fees and charges. CBK therefore defines the total cost of credit as KESONIA plus the premium and applicable fees.

The model applies to variable-rate loans, except foreign-currency loans and fixed-rate loans. Where KESONIA is not practical, CBK allows the Central Bank Rate to be used as an alternative reference rate.

That structure gives borrowers a clearer way to separate the market reference rate from the bank-specific premium and charges attached to a loan.

Why KESONIA matters?

KESONIA is the transaction-based average rate for unsecured overnight borrowing and lending between banks in Kenya. CBK publishes it each business day and uses it as the operating target under the modernised monetary-policy framework.

CBK renamed the overnight interbank average rate KESONIA from 1 September 2025 as part of the move towards international benchmark standards. The methodology itself remained based on actual overnight interbank transactions.

The benchmark is designed to move closely with the Central Bank Rate. On 1 October 2026, CBK reported KESONIA at 8.7505%, while the CBR stood at 8.75%.

That connection matters because changes in the policy rate can feed more directly into the reference component of variable-rate borrowing.

What are rates doing?

The framework is already operating alongside a gradual decline in average commercial-bank lending rates.

CBK’s latest key-rate data put the average lending rate at 14.34% in August 2026, down from 14.39% in July. The June 2026 Monetary Policy Statement had reported an average lending rate of 14.4% in June, compared with 14.8% in December 2025.

The same statement said private-sector credit growth strengthened to 10.6% in June 2026 from 5.9% in December 2025, while the RBCPM was supporting the transmission of monetary policy decisions into lending rates.

The figures do not mean every borrower is paying 14.34%. The published rate is an average across the banking sector, while an individual loan price depends on the reference rate, the bank’s premium, fees and the borrower’s risk profile.

What should borrowers watch?

The biggest change is greater visibility over the components of a variable-rate loan.

CBK requires banks to publish their weighted average lending rates, weighted average premiums and fees and charges for their lending products on their websites and the Total Cost of Credit website.

For borrowers comparing loans, that information can make headline interest rates less useful on their own. A lower advertised rate can still come with fees or a larger premium, while a higher-risk borrower may receive a different price from a lower-risk customer.

The framework also means borrowers should pay attention to the reference rate used in their loan agreement, how often the rate resets and the fees attached to the facility.

CBK’s KESONIA framework provides for a fallback to the CBR when KESONIA data is unavailable, and loan contracts should provide for that contingency.

What happens when rates move?

A fall in the reference rate can reduce the interest component of a variable-rate loan if the bank’s premium and other charges remain unchanged. A rise can work in the opposite direction.

That does not mean every change in the CBR will immediately produce the same movement in every loan. The premium reflects factors that are specific to the bank and borrower, while fees and contract terms also affect the final cost.

The broader objective is to make that transmission easier to understand. CBK says the modernised framework is intended to strengthen monetary-policy transmission and improve transparency in lending.

For households and businesses, the practical test will be whether borrowers can compare the reference rate, bank premium and charges more easily and see how changes in monetary policy affect their financing costs.

Kenya’s next MPC meeting is scheduled for 7 October 2026, with the CBR currently at 8.75%. The decision will provide another test of how the modernised framework transmits any change in the policy stance into market rates and, eventually, borrowing costs.