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Uniform cost of credit as base loan rates converge at 8.75pc
Kenya Bankers Association Acting General CEO Raimond Molenje speaks during the Launch of the Chora Plan financial literacy campaign on June 11, 2024 at the Serena Hotel in Nairobi.
The Central Bank Rate (CBR) and a new benchmark rate for pricing loans have converged at 8.75 percent, creating a single industry stand for assessing the cost of credit.
The Kenya Shilling Overnight Interbank Average (Kesonia), which is the overnight lending rate among banks that was launched in December, has settled at an average of 8.75 percent in recent weeks to match the CBR, resulting in a uniform loans reference rate.
The convergence of the two rates implies that the banking industry now has a single reference rate for loans, making it easy for customers to compare loan prices between various lenders applying different metrics.
Local banks have had to choose either CBR or Kesonia, or both rates, as the benchmark for pricing loans to customers.
The use of different benchmark rates meant that customers were not be able to directly compare borrowing costs between banks as each lender used one of the two allowable reference rates or both.
The total lending rate for a customer adds the chosen benchmark to each borrower’s risk premium denoted as K alongside additional fees and charges.
“The convergence means that there is no material difference in banks using either CBR or Kesonia as the reference rate for variable rate loans,” said Raimond Molenje, the chief executive officer of the Kenya Bankers Association (KBA).
As of mid-April, nearly three-quarters of banks snubbed the use of the new risk-based pricing formula, Kesonia, which was introduced by the Central Bank of Kenya (CBK).
This denied customers a more transparent reference rate to assess the cost of borrowing between lenders.
Commercial banks began applying the new pricing formulas on all new variable rate loans starting on December 1, 2025, while changes on existing variable loans was expected to apply from February 28, 2026.
Banks are required to publish the costs on their websites and on the Total Cost of Credit website including their weighted average lending rates, weighted average premium (K), and fees and charges for each of their lending products.
Most banks had fallen back on the CBR despite successfully fighting the apex bank over an earlier proposal to use the benchmark as the base for the revised loan pricing models.
Banks argued that adopting CBR was equivalent to the re-introduction of interest rate caps, stating that the benchmark rate of the apex bank is not market driven.
An analysis of commercial bank rates established that 27 out of 37 lenders opted for the CBR as their key reference rate, with only a minority adopting Kesonia as their benchmark.
The final revised risk-based credit pricing model was anchored on Kesonia which was designed to increase transparency and lower credit costs.
Banks were, however, allowed to deploy the CBR benchmark as a backup option.
The preference for CBR over Kesonia was attributed to the shortened window given to banks transitioning to the revised risk-based pricing by CBK.
Almost all tier-one banks have adopted the CBR as their benchmark rate for loan pricing including Equity, KCB, Absa Bank Kenya, Standard Chartered, NCBA and DTB.
The Cooperative Bank of Kenya was an outlier, opting for Kesonia as its benchmark alongside Habib Bank AG Zurich and ABC Bank. Two banks, Citibank N.A. Kenya and Stanbic Bank Kenya, adopted both CBR and Kesonia.
Previously, each commercial bank had its own approved benchmark from which to price loans, but the model ran into chaos by creating 37 different reference rates.
The divergence in rates was seen to impede cheaper borrowing costs for customers.
Kesonia can only rise by 0.5 percentage points above the prevailing CBR rate and must not fall below the benchmark by more than 0.5 percentage points.
The corridor implies that Kesonia and CBR would only differ slightly.
The convergence of the rate increases the efficiency of monetary policy decisions by CBK, allowing banks to quickly translate movements in the apex bank’s benchmark to loan pricing.
“Essentially, an alignment implies effective transmission of monetary policy to the interbank market,” added Mr Molenje.
“Any instance, where CBK does not participate in affecting marketing liquidity conditions, via injections or withdrawals, would yield an interbank rate (Kesonia) that is misaligned with the CBR. This would mean that there is no transmission of monetary policy.”
Banks’ lending benchmarks are now aligned with the CBR, where a rise in the rate is followed by higher borrowing costs, while cuts anchor lower loan interest rates.
Average commercial bank lending rates have fallen to match monetary policy easing over the past year, with the mean loan rate dropping to 14.5 percent in May 2026 from a peak of 15.4 percent in May 2025.
Short-term interest rates and commercial bank lending rates have declined in line with recent reductions in the CBR, which fell from 13 percent in August 2024 to 8.75 percent at present.
CBK held the rate unchanged at its most recent policy-setting meeting amid uncertainty over the effects of the Iran war.
The lower borrowing costs have supported the recovery in private sector credit growth, whose expansion neared double-digit rates at 9.3 percent in May, contrasting with just two percent a year earlier.
“The monetary policy implementation framework has continued to support stability of Kesonia and has aligned the rate closer to the CBR and enhanced monetary policy transmission,” Kamau Thugge, CBK Governor, said previously.
