Will Kenya’s New Loan Pricing System Deliver Fairer Rates—or Lock Out Riskier Borrowers?
For years, lenders blamed inflation and risk, but with a new benchmark in play, those arguments may not hold water anymore.
The Central Bank of Kenya (CBK) has put commercial banks on notice: stop hiding behind excuses and start lowering lending rates. At the heart of this demand is a new framework, the Kenya loan pricing model, anchored by the Kenya Shilling Overnight Interbank Average (KESONIA).
KESONIA will serve as the base reference for most variable-rate loans starting September 2025, with full adoption expected by February 2026. For borrowers weary of opaque loan agreements and inconsistent bank practices, this could mark the beginning of a more transparent era. For banks, however, the shift raises uncomfortable questions about profit margins, compliance, and how to balance shareholder returns with regulatory pressure.
How the KESONIA Benchmark Works
The revised structure is straightforward on paper. Lending rates will be made up of:
- KESONIA as the base – a benchmark closely tied to the CBK rate, designed to reflect real liquidity costs in the interbank market.
- Premium “K” – an added margin capturing each borrower’s risk profile, the bank’s operating costs, and shareholder return expectations.
- Additional fees – processing charges, origination fees, and other add-ons disclosed upfront as part of the Total Cost of Credit (TCC).
By requiring banks to publish how these numbers add up, the CBK hopes to strip away the opacity that has long shielded lenders from scrutiny.
Why the New Loan Pricing Model Matters
Transparency for Borrowers
Kenyans have long struggled to make sense of loan contracts that list arbitrary “base rates” or sudden fee adjustments. By mandating disclosure of the full cost of credit, the CBK is trying to create a marketplace where borrowers can compare banks on an even footing.
Stronger Policy Transmission
One frustration for policymakers has been how slowly banks pass on rate cuts to customers. When the CBK cut its benchmark rate by 3.5 percentage points over the past year, lenders only reduced borrowing costs by about 2 points. Tying rates to KESONIA should make such lagging responses harder to justify.
Alignment with Global Practice
Many advanced markets already use interbank averages like SONIA (UK) or SOFR (US) as loan benchmarks. Kenya’s adoption of KESONIA signals a push to modernize, aligning local banking practices with international standards.
The Challenges Ahead
The Kenya loan pricing model is not without its hurdles:
- Operational readiness – Many banks still lack fully approved risk-based pricing frameworks. Smaller lenders, SACCOs, and micro-finance institutions may struggle most.
- Risk of credit tightening – By spotlighting borrower risk profiles, the model may push banks to hike rates for SMEs and informal businesses that lack credit histories.
- Regulatory friction – Lenders argue that CBK oversight of “premium K” risks re-introducing de facto rate controls reminiscent of the 2016–2019 interest rate caps.
- Enforcement gaps – Publishing numbers is one thing; ensuring accuracy, fairness, and compliance will require sustained inspections and possibly penalties.
| Concern | What it is | Why it’s significant |
|---|---|---|
| Perceived re-introduction of rate caps | Banks worry that requiring CBK oversight of the premium “K” effectively amounts to regulatory rate control, i.e. similar to the interest rate caps between 2016-2019. | Could stifle lending, especially to riskier sectors; could prompt conservative risk assessment or withdrawal from SME and low-income lending. |
| Operational capacity | Some banks have not yet gotten CBK approval for their internal risk-based pricing models. As of May 2025, only about 60% of loan books were risk‐priced. | Lag in systems, data, human resources, risk modeling could delay meaningful application. |
| Unclear K determination and disclosure mechanics | How exactly will “K” be set for different borrowers? Will there be standard bands, or does every loan require custom risk assessment? Some banks say “submitting K for each customer is impractical”. | Without clarity, there’s room for disparity, mispricing, and possible regulatory second-guessing. Also risk of confusion/complaints by borrowers. |
| Potential credit tightening | Banks may respond to risk aversion by charging higher premiums or reducing exposure to perceived ‘riskier’ borrowers. Some low‐credit history individuals or small businesses might find loans more expensive or harder to get. | Could harm inclusive growth, reduce access for MSMEs or underserved communities. |
| Enforcement and compliance | CBK has announced inspections and potential penalties, but enforcing fine details (premium K, fees, disclosures) will require oversight, auditing, data tracking. | Possible evasion, slow compliance, banks passing costs elsewhere. |
Early Reactions from the Industry
Bank executives have cautiously welcomed the clarity KESONIA brings, likening it to a “wholesale price” that provides consistency across the industry. Yet the Kenya Bankers Association has warned that too much regulatory intervention could stifle credit growth.
Meanwhile, the CBK Governor Kamau Thugge has doubled down, urging lenders to adopt the framework quickly or risk losing customers to more transparent competitors. “There should be no excuse,” he said, signaling that regulators will not tolerate half-measures.
What Borrowers Should Watch
- Bank websites and disclosures – check whether your lender is publishing the full Total Cost of Credit.
- Premium K explanations – insist on clarity about why you are being assigned a particular risk premium.
- Shifts in lending to SMEs – monitor whether banks begin rationing credit or adjusting collateral demands.
- Regulatory enforcement – keep an eye on CBK’s inspections and whether any banks face penalties.
Transparency vs. Reality
The Kenya loan pricing model, anchored in KESONIA, is designed to bring transparency and accountability to a system that has often favored lenders over borrowers. If implemented faithfully, it could give Kenyan borrowers a fairer deal and make monetary policy more effective.
But the reality is messier. Banks may resist, borrowers may be confused, and regulators may struggle to enforce compliance consistently. The outcome depends on whether this new system becomes a tool for genuine fairness—or just another layer of financial jargon.
Go to TECHTRENDSKE.co.ke for more tech and business news from the African continent.
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