Revised Credit Pricing Strategy Introduced by CBK using KESONIA Benchmark for Enhanced Transparency and Efficient Monetary Policy Implementation
The Central Bank of Kenya (CBK) has announced a significant overhaul of the credit pricing structure in commercial banks. This change, effective from September 1, aims to improve the transmission of monetary policy in Kenya and address historical weaknesses.
Under the new system, KESONIA, a renamed version of the overnight interbank rate, will reflect actual transactions between banks. This transaction-based benchmark is similar to the UK's SONIA and the US's SOFR, linking credit pricing to real-time market conditions.
Banks will be mandated to publish the average lending rates and associated fees for each of their products on their websites and the CBK's Total Cost of Credit portal. This move towards transparency is expected to foster fairer and more competitive lending practices.
The revised structure links lending rates to the newly introduced interbank benchmark, KESONIA. The new pricing formula sets the lending rate as KESONIA plus a margin, "K", which covers the bank's cost of funds, returns to shareholders, and the borrower's risk profile.
Borrowers with weaker credit histories could face higher borrowing costs under the new system, while those with stronger profiles may benefit from clearer differentiation in risk. However, the specific guidelines for the "K" surcharge on the KESONIA base rate have not been named by Kenyan banks yet, nor is there a stated timeline for their publication.
The first test of the new system will be in September when banks begin offering new loans under the revised framework. Existing loans will transition to this new system by February 2026, following a six-month adjustment period.
The CBK's decision to overhaul the credit pricing structure is a response to the banking sector's reluctance to reduce interest rates. This reform follows several months of friction between the CBK and commercial banks.
The new credit pricing system aims to address concerns raised by opposing parties and create a transparent anchor rate while allowing banks to set borrower-specific premiums. If KESONIA is not feasible, customers may instead use the Central Bank Rate (CBR) as an alternative reference rate.
The CBK hopes that this reform will improve the effectiveness of monetary policy transmission and foster a more efficient and competitive banking sector in Kenya. The success of the new system will depend on how banks disclose and justify the "K" premium, ensuring that the CBK's promise of fairer and more transparent lending practices is fulfilled.
