The Central Bank of Kenya (CBK) has introduced a new way for banks to calculate loan interest rates, using a market-based benchmark known as KESONIA.
It is a shift from the old “base rate + margin” system, which many borrowers found unclear and inconsistent across banks.
What Is KESONIA?
KESONIA stands for the Kenya Shilling Overnight Interbank Average Rate and it reflects the real cost of borrowing between banks in the money market.
By using KESONIA as the starting point for all variable-rate loans, the CBK aims to ensure that loan pricing is transparent, fair, and uniform across the financial sector.
How Will Loans Be Priced Now?
Under the new model, the cost of a loan will be built using this simple formula:
Loan Interest Rate = KESONIA + Premium (K) + Fees & Charges
Here’s what each part means:
- KESONIA: The base rate, updated daily and determined by market conditions, not individual banks.
- Premium (K): A margin added by the bank depending on:
- Your risk profile
- The bank’s operational costs
- The type of loan
- The bank’s desired profit
- Fees & Charges: These include processing, origination, insurance, or other approved fees that banks must fully disclose.
Also Read: CBK to Revise Loan Pricing Model to Align with Market Realities
This structure ensures borrowers see exactly how their loan costs are built, rather than receiving a single blended rate.
Who Does This Affect?
This model applies primarily to variable-rate loans, not fixed-rate loans. To mean that new variable-rate loans will use KESONIA from the start and existing variable-rate loans will gradually transition to the new system within the set timelines.
What It Means for Borrowers
More Transparency
Borrowers will clearly see the base rate (KESONIA), the risk premium added by their bank and the full list of fees
It also means fairer pricing, as your interest rate will now depend more on your actual risk rather than just a bank’s internal base lending rate.
- Good credit history = potentially lower premium
- Higher-risk borrowers may pay more, but banks must justify the cost clearly
Alignment With Global Standards
Using a market-based benchmark like KESONIA aligns Kenya with international best practices. Many major economies use similar reference rates to price loans.
Predictability
Because KESONIA is publicly available and updated regularly, borrowers can track the benchmark and understand how market conditions impact loan costs.
Why CBK Made This Change
CBK’s goal is to improve transparency in loan pricing, encourage responsible lending, promote fair competition among banks, ensure borrowers understand how their interest rates are determined and potentially reduce arbitrary or uneven loan pricing across the banking sector.
