Nearly three-quarters of banks have snubbed the use of the new risk-based pricing formula introduced by the Central Bank of Kenya (CBK), denying customers a more transparent reference rate to assess the cost of borrowing.
An analysis of commercial bank lending rates established that 27 out of 37 banks have opted for the Central Bank Rate (CBR) as their key reference rate, with only a minority adopting Kesonia as their benchmark.
The final revised risk-based credit pricing model was to be anchored on the Kenya Shilling Overnight Interbank Average (Kesonia), which is the new base rate for all variable interest loans, designed to increase transparency and lower credit costs.
Banks were, however, allowed to deploy the CBR benchmark as a backup option.
Low uptake
The banking industry lobby says banks had little time to recalibrate loan pricing to Kesonia in time for the transition, hence the fallback to the CBR rate.
‘It was an issue of the timelines that were provided. It was easier to adopt the CBR from the get-go. The timelines were quite tight and the Kesonia system recalibration would have taken time,’ said Dr Samuel Tiriongo, the Head of Research at the Kenya Bankers Association (KBA).
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 has been 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 – have adopted both CBR and Kesonia.
Five – Access Bank Kenya, Development Bank of Kenya (DBK), Kingdom Bank, Premier Bank and SBM Bank Kenya – did not disclose their benchmark rates.
Previously, each commercial bank had its own approved benchmark from which to price loans, an aspect that created chaos in tracking the pricing of loans, as the industry had approximately 37 reference rates.
Banks argued that the different reference rates made it difficult for the lenders to lower borrowing costs as an industry, resulting in rebuke from the CBK, which demanded interest rate cuts to reflect the ease in monetary policy or a lower CBR.
The CBK expects a closer comparison of interest rates across banks as both Kesonia and CBR are tied at the hip following the establishment of an interest rate corridor around the apex bank’s benchmark.
Pricing model
Kesonia can only rise by 0.75 percentage points above the prevailing CBR rate and must not fall below the benchmark by more than 0.75 percentage points. The corridor implies that Kesonia and CBR would only differ slightly.
The CBK has insisted that it does not desire to control bank interest rates but seeks to have commercial banks’ borrowing costs mirror the CBR. Commercial banks began applying the new pricing formulas on all new variable loans on December 1, 2025, while changes on existing variable loans took place between December 1 and February 28, 2026.
Under the new model, the total lending rate will be the interbank rate plus a premium or K, which is believed to align with the policy rate.
The interbank market rate refers to the rate at which commercial banks borrow and lend money among themselves on a short-term basis and is widely relied upon as the gauge of how liquid the market is.
The premium K will be a factor of a bank’s operating costs related to its lending business, the expected return to shareholders, and the borrower’s risk premium.
The interbank rate, however, has limits in terms of volatility because it operates within limits fixed on the CBK benchmark rate to ensure the benefits of monetary policy are transmitted to the real economy.
The limit currently stands at plus or minus 75 basis points of CBR.
This means that the interbank rate cannot rise above 0.75 percentage points of the CBR of 8.75 percent or a maximum of 9.50 percent, and not less than 8.0 percent.
Kenya’s central bank paused its rate-cutting cycle on April 8, keeping its benchmark lending rate at 8.75 percent to monitor second-round effects from a surge in global energy prices triggered by the Iran war.
The decision follows 10 consecutive rate cuts in the push to lower the cost of credit and stimulate lending.
Banks still insist they favour Kesonia over CBR and that they hope to make the transition to the overnight lending rate as the industry benchmark over time.
‘We still desire to transition to Kesonia and we continue to have discussions among ourselves and even with the CBK,’ added Dr Tiriongo.