Banks have chosen different benchmarks to price loans under the new risk based pricing formula, denying customers a uniform reference rate to assess the cost of borrowing.
The Central Bank of Kenya has noted that nearly half of the 37 lenders 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 overnight lending rate among banks as rate as CBK pushed to strengthen the transmission of its monetary policy decisions.
The use of different benchmark rates means that customers will not be able to directly compare borrowing costs between banks as each lender uses one of the two allowable reference rates of both.
The total lending rate for a customer tally adds the chosen benchmark to each borrower’s risk premium denoted as K alongside additional fees and charges.
“About 48 percent of banks have used the CBR while another 34 percent are using both the CBR and KESONIA while the remainder are banks who have chosen to use KESONIA alone,” CBK Governor Dr. Kamau Thugge said on Wednesday.
“All commercial banks have submitted their risk-based pricing formulas which they will be implementing and we expect this to be a transparent process.”
Commercial banks began applying the new pricing formulas on all new variable rate loans starting on December 1, 2025, while changes on existing variable loans are expected to take place from February 28, 2026.
Banks are required to publish the costs on their websites and on the Total Cost of Credit website including their weighted average lending rates, weighted average premium (K), and fees and charges for each of their lending products.
Most banks have fallen back on the CBR despite successfully fighting the apex bank over an earlier proposal to use the benchmark as the base for the revised loan pricing models.
Banks argued that adopting CBR was equivalent to the re-introduction of interest rate caps, stating that the benchmark rate of the apex bank is not market driven.
Earlier this month, banks including KCB, Equity, Absa, NCBA and DTB issued notices that they would be using the CBR as their reference rate.
“By rejecting the interbank rate as a preferred unified base rate and proposing the CBR, the CBK will not operationalize the policy decision after setting the CBR,” Raimond Molenje, the chief executive officer of the Kenya Bankers Association (KBA) argued in a memo to CBK previously.
Sources in banks previously deemed Kesonia as too volatile, indicating that it would mean reviewing lending rates regularly with revisions requiring authorization from CBK and communication to customers.
KBA noted that the application of CBR allows member banks to learn and accommodate system upgrades required before Kesonia use.
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 an approximate 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 CBK which demanded interest rate cuts to reflect the ease in monetary policy or a lower CBR.
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.
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.
“There is convergence between KESONIA and CBR, and in that sense, it does make it easier for banks to use either benchmark because essentially, both rates are the same,” Thugge added.
CBK has insisted that it does not desire to control bank interest rates but seeks to have commercial banks borrowing costs mirror the CBR.
CBR cuts dictate that banks interest rates should generally move lower while a higher benchmark rate signals costlier loans.
On Tuesday, CBK cut its benchmark rate as its ninth straight monetary policy committee meeting, bringing the CBR to nine percent from 9.25 percent in October with the view of augmenting similar policy actions aimed at stimulating lending by banks to the private sector and supporting economic activity.
Private sector credit growth hit a 19-month high in November mirroring recovery in lending on falling borrowing costs.
“Growth in commercial banks’ lending to the private sector continued to improve and stood at 6.3 percent in November 2025 compared to 5.9 percent in October and a contraction of 2.9 percent in January,” CBK said in a statement on Tuesday.
“This mainly reflects improved demand for credit in line with the declining lending interest rates.”
Average commercial banks’ lending rates declined to 14.9 percent in November 2025 from 15 percent in October and 17.2 percent in November 2024.
