Kenya’s banking sector is entering a major shift as the Central Bank of Kenya (CBK) moves all new variable-interest loans to a common reference rate known as the Kenya Shilling Overnight Interbank Average, or KESONIA.

The shift to KESONIA-based pricing for new variable-rate loans began on September 1, 2025, per CBK’s revised Risk-Based Credit Pricing Model (RBCPM). However, many banks negotiated a 3-month grace period, delaying full implementation for new loans until December 1, 2025, to allow for system updates and board approvals.

This transition is part of CBK’s wider effort to modernise the country’s benchmark interest rate framework. It follows the global trend of using transaction-based, risk-free rates that reflect real market activity.

What is KESONIA?

KESONIA is the average interest rate at which commercial banks in Kenya lend and borrow unsecured overnight funds in shillings. In simple terms, it shows the true cost of money between banks from day to day.

CBK serves as the administrator of KESONIA. It collects the transaction data, verifies it, calculates the average, and then publishes the number every business day by 9:00am. On weekends and public holidays, the rate stays unchanged.

KESONIA currently stands at 9.25 per cent, slightly down from 9.5922 per cent when CBK launched it on September 1, 2025. The rate has remained stable in recent days in line with a steady shilling and improved liquidity.

KESONIA is calculated using data from overnight interbank trades. Banks lend and borrow funds with each other to meet short-term liquidity needs. At the end of each business day, the Central Bank of Kenya (CBK) collects this data and checks it for accuracy to ensure it reflects actual market activity.

CBK then computes the average rate and updates the KESONIA Compounded Index. Both the daily rate and the compounded index are published the next morning. This method makes KESONIA a transparent benchmark, as it is based on real transactions rather than estimates or opinions from banks.

Why CBK is introducing KESONIA

The shift targets several long-standing issues in Kenya’s lending market. Previous reference rates, including the Kenya Banks’ Reference Rate (KBRR), did not fully reflect actual market conditions.

The Central Bank of Kenya (CBK) aims to make interest rates more transparent. It also wants to strengthen monetary policy transmission so that changes in the Central Bank Rate (CBR) flow more directly to loan prices. Another goal is to establish a stable and reliable benchmark that aligns with global standards.

CBK seeks cleaner, risk-free pricing, where the base rate reflects actual market activity before banks add customer-specific risk premiums. This approach follows reforms in other countries, where overnight market rates serve as the main benchmark for loan pricing.

Impact on borrowers and businesses

The new system is expected to make borrowing fairer. High-quality customers will be able to access cheaper loans. Individuals with weak credit histories will still face higher premiums, but the pricing will be more predictable and transparent.

The CBK says the shift will open credit access to groups that often struggle to borrow, such as:

MSMEs

Youth

Persons with disabilities

Women-led enterprises

Banks will be able to price risk more accurately and lend with greater confidence.

The new Risk-Based Credit Pricing Model means interest rates will now vary more sharply from one borrower to another. The system makes financial discipline more important than ever, because personal credit behaviour now plays a major role in determining the final cost of a loan.

CBK’s explanation

“The new framework starts with the anchor of the interbank rate, which really is the cost of funds. Each bank will then add a premium. This is a very versatile framework because it doesn’t have to be that the banks are adding a premium; they can also be reducing,” he said.

“If you have a very good customer and not very much risk, maybe their loan is backed by deposits in your bank, you can decide to say your loan will be KESONIA minus 1 or minus 2. If it’s a very high-risk borrower, it will be KESONIA plus three or plus four.”

Borrowers with stable incomes, clean credit histories, and consistent repayment records will qualify for lower premiums, while those with past defaults or irregular repayment patterns will face higher borrowing costs.

Banks will also be required to fully disclose all fees, charges, and the total cost of credit, making it easier for Kenyans to compare loans across different lenders.

Transition timelines

The shift will take place over six months:

September 1- November 30, 2025: Banks review, adjust, and get board approval for their risk-based pricing models.

From December 1, 2025: All new variable-rate loans use KESONIA as the base rate.

By February 28, 2026: All existing variable-rate loans migrate to the new system.

This staged rollout is meant to minimise disruption and give lenders enough time to adapt.

Several top lenders have already begun implementing the new pricing structure following pressure from the Central Bank to meet the year-end compliance deadline. According to the Kenya Bankers Association (KBA), all lenders must fully migrate existing variable-rate loans to the new framework by February 28, 2026, in line with CBK’s mandatory transition schedule.