KESONIA Explained: How Kenya’s New Loan Benchmark Affects Your Borrowing

The Kenyan banking sector is about to face a major change as the Central Bank of Kenya shifts all variable-rate new loans to a single reference rate called the Kenya Shilling Overnight Interbank Average, alias KESONIA. The move, aimed at modernizing the country’s benchmark interest rate framework, promises more transparency, fairness, and predictability in lending.

Effective September 1, 2025, CBK introduced the revised Risk-Based Credit Pricing Model, providing that all new variable-rate loans should be priced based on KESONIA. However, many banks negotiated a 3-month grace period to update their systems and obtain board approvals for full implementation of the pricing beginning December 1, 2025, for new loans. The staged rollout ensures a smooth transition while aligning Kenya with global best practices that rely on transaction-based, risk-free rates reflecting actual market activity.

Understanding KESONIA

KESONIA measures the average interest rate at which commercial banks lend and borrow unsecured overnight funds in Kenyan shillings. Put simply, it reflects the true day-to-day cost of money between banks.

CBK serves as KESONIA’s administrator, collecting transaction data, verifying accuracy, calculating the daily average, and publishing the rate every business day by 9:00 a.m. On weekends and public holidays, the rate remains unchanged.

Currently, KESONIA stands at 9.25 percent, slightly lower than the 9.5922 percent recorded when it launched on September 1. The rate has remained stable in recent days, supported by a steady shilling and improved liquidity in the banking sector.

How CBK Calculates KESONIA

CBK calculates KESONIA using overnight interbank trade data. Banks lend and borrow short-term funds from one another to manage liquidity needs. At the end of each business day, CBK collects and verifies the transaction data, ensuring it accurately reflects market activity. The Central Bank then computes the average rate and updates the KESONIA Compounded Index, publishing both the daily rate and the compounded index the next morning.

This method provides a transparent benchmark, as KESONIA relies on real transactions rather than subjective bank estimates or opinions. It represents a significant departure from older reference rates like the Kenya Banks’ Reference Rate (KBRR), which often failed to reflect actual market conditions.

Why CBK is Implementing KESONIA

CBK’s move addresses several long-standing challenges in Kenya’s lending market. The central bank aims to make interest rates more transparent and strengthen monetary policy transmission so that changes in the Central Bank Rate (CBR) flow more directly to loan prices. Another key objective is to establish a stable and reliable benchmark aligned with global financial standards.

“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,” CBK explained.

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

Impact on Borrowers and Businesses

The shift is expected to make borrowing fairer and more transparent. High-quality borrowers will gain access to cheaper loans, while individuals with weak credit histories may face higher premiums, but with more predictable pricing. The CBK notes that the move will expand credit access to underserved groups, including MSMEs, youth, persons with disabilities, and women-led enterprises.

The Risk-Based Credit Pricing Model means interest rates will now vary more sharply from one borrower to another, making financial discipline more critical than ever. Borrowers’ personal credit behaviour now plays a central role in determining their loan costs.

“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,” CBK said.

Borrowers with stable incomes, consistent repayment histories, and clean credit records will qualify for lower premiums. Those with past defaults or irregular repayment patterns may face higher borrowing costs. Banks must also fully disclose all fees, charges, and the total cost of credit, making it easier for Kenyans to compare loans across lenders.

Transition Timelines

The transition to KESONIA will take place over six months:

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

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

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

This staged approach minimizes disruption while giving lenders adequate time to adapt. Several major banks have already started implementing the new pricing structure, responding to CBK’s directive 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 KESONIA framework by February 28, 2026, in line with the Central Bank’s mandatory transition schedule.

Looking Ahead

Analysts say this overhaul will reshape Kenya’s lending market, creating a fairer, more competitive environment for borrowers and improving confidence in the banking sector. By linking loan pricing to actual interbank transactions, CBK has introduced a system that rewards financial discipline and supports broader access to credit, particularly for groups previously excluded from mainstream banking.

This landmark move positions Kenya alongside global financial markets that rely on transparent, transaction-based benchmarks, marking a significant step toward a more modern and inclusive banking system.

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