The Central Bank of Kenya (CBK) has asked banks to end excuses for failing to reduce the cost of loans in line with the reduced benchmark rate as the revised risk-based pricing regime takes effect.
Commercial banks are expected to adopt a new industry loan-pricing standard dubbed the Kenya Shilling Overnight Interbank Average (Kesonia) by February 2026 as CBK moves to align lending rates to the Central Bank Rate (CBR).
The call to bankers comes amid admission of difficulties by the industry to reduce borrowing costs for customers in line with expectations.
“There should be no excuse by banks for whatever reason…there have been quite a number of excuses. This time, there won’t be an excuse. Once we lower the rate, banks should also lower their rates,” said CBK Governor Kamau Thugge.
The overnight interbank lending rate, or Kesonia, is expected to come down when the CBK cuts its benchmark rate. A rise in CBR, on the other hand, would result in higher lending rates. Kesonia is closely tied to the CBR under the interest-rate corridor framework, where overnight lending rates for borrowing between banks are held at no more or less than 0.75 percent of the benchmark.
The total cost of credit to a borrower equals Kesonia plus a premium denoted as K, which is determined according to the risk profile of each customer, but also factors in bank lending margins plus expected returns to shareholders. The CBK says the new pricing regime should not be mistaken for attempts by the regulator to control interest rates.
Banks have cited hurdles to cutting interest rates on loans to customers, including different base lending rates and the poor development of the risk-based pricing framework previously.
“I would equate the industry benchmark to the wholesale price of a shopkeeper selling soap. Previously, everybody had their wholesale price. There was no uniform perimeter for the CBR prices to speak to. Kesonia is now our wholesale price,” said Kenya Bankers Association chief executive Raimond Molenje.
Lenders also failed to fully implement risk-based pricing, forcing borrowers into silos while locking out others.
Banks are now expected to match borrowers’ lending rates to their risk profiles, with expected online and onsite inspections by the CBK acting as a caution to banks wanting to abandon the new framework.
“The other challenge was capacity within banks when setting up risk-based pricing in 2019 and 2020. Because of competition, most banks did not seek assistance. For the majority, the feedback was that interest rates were always going up, leading some to abandon their frameworks,” added Mr Molenje.
The CBK has cut its benchmark by three and a half percentage points from 13 percent in August last year to 9.5 percent at present.
Banks have failed to translate the same cut to borrowers, with the CBK estimating interest rate reductions by lenders at an average of two percentage points from 17.2 percent to 15.2 percent in the same period.
The CBK has challenged banks to quickly adopt the new pricing models to take advantage of the benefits of transparency to customers.
“If I were you, I would move as quickly as possible to implement this framework because Kenyans will choose to go to a bank with a transparent framework,” said Dr Thugge.
