The Central Bank of Kenya (CBK) introduced a new risk-based loan pricing framework in August 2025, as the exchequer noted, to “strengthen monetary policy transmission, enhance transparency in lending, and promote responsible lending by aligning credit pricing with the borrowers’ risk profiles”.
The new formula is expected to change how lenders set interest rates for borrowers.
The model aims to bring transparency, fairness, and comparability to Kenya’s credit market.
In a media interview with NTV on Tuesday, December 3 2025, CBK governor Kamau Tgugge explained how the new pricing model work.
CBK Explains the New Loan Pricing Model
According to Dr. Thugge, all banks will now set their loan rates on a uniform baseline tied to the interbank rate, the Kenya Shilling Overnight Interbank Average (KESONIA).
“So, we felt that we needed to change it and make it more appropriate.
And therefore, we came up with a paper, we circulated to the public, we got a lot of comments from the banking sector, from the private sector, from international development partners. And then we came up with a new framework. So the new framework starts with the anchor of the interbank rate, which is really the cost of funds,” said the CBK Governor.”
Dr. Thugge further explained that once the KESONIA rate is set as the common baseline, each bank will adjust it depending on a customer’s risk level.
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Banks can add a premium for high-risk borrowers or reduce the rate for low-risk clients. For instance, a customer with strong creditworthiness, or one whose loan is backed by deposits, could be offered KESONIA minus one or two percent. However, riskier borrowers may pay KESONIA plus three or four percent.
This flexibility, he said, allows banks to price loans more fairly based on individual risk rather than arbitrary or inconsistent methods.
“Then each bank will then add a premium. And what we’re seeing is that this is a very versatile framework because it doesn’t have to be that the banks are adding a premium. They can also be reduced,” the CBK Governor explained.
“In other words, if you have a very good customer and little risk, maybe even their loan is backed by deposits in your bank, you can say your loan will be Kesonia minus one or minus two. If it’s a very high-risk person or borrower, it will be, you know, Kasonia plus three or plus four.”
About KESONIA
The Central Bank of Kenya (CBK) introduced a revised Risk-Based Credit Pricing Model that is based on the Kenya Shilling Overnight Interbank Average (KESONIA).
Previously, each bank used its own specific interbank rate for transactions, but now, a weighted average of all overnight interbank transactions will be published as KESONIA. This change gives the rate a clear identity and aligns it with international benchmarks, such as the Sterling Overnight Index Average (SONIA) in the UK and the Secured Overnight Financing Rate (SOFR) in the US.
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The methodology for calculating KESONIA remains unchanged; it is still based on actual overnight interbank transactions. However, this renaming formalizes it as Kenya’s official reference rate.
The revised model aims to enhance transparency in lending, relate borrowing costs to the risk associated with each customer, and improve the transmission of monetary policy.
Under the new model, lending rates will be set as KESONIA plus a premium to cover costs, profits, and borrower risk.
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