Credit continues to drive economic growth. However, according to the latest Monetary Policy Committee (MPC) statement by the Central Bank of Kenya (CBK), an increase in commercial bank lending to the private sector remains only 3.3% in July 2025, down from a high of 13.9% in 2023. To make matters worse, the average lending rate was reported as 15.2% in the same period. Despite a stable macroeconomic environment and resilient growth in Q1 of 2025, these statistics indicate that there is still room to boost economic growth in Kenya through improved access to credit and a better credit pricing regime, especially for MSMEs.

The History of Lending Rates

The government, in its effort to increase access to credit, has introduced various strategic initiatives, laws, and policies aimed at improving access to finance at affordable rates. In 1991, lending rates in Kenya were liberalised [1]. This led to high lending costs, prompting the release of the lending reference rate, known as the Kenya Banks Reference Rate (KBRR), by the CBK in 2014 (Tiriongo et al., 2023). The KBRR was reviewed and announced by the CBK through the MPC Press Release every six months and was implemented through Banking Circulars.

KBRR did not prove to be particularly effective in reducing lending rates, as they remained high. In an effort to curb high interest rates, the government introduced interest rate capping in 2016. However, three years later, in 2019, the interest rates were repealed due to undesirable outcomes, such as a reduction in credit supply, which affected the money supply (Tiriongo et al., 2023). The following year, amidst the COVID-19 pandemic, Kenya’s Banking Sector Charter mandated that commercial banks implement risk-based credit pricing, which requires loan interest rates to be determined by a customer’s risk profile, bank operating costs, and the return on shareholders’ investment. The revised risk-based credit pricing model was released in August 2020.

The new model meant that borrowers with high-risk scores could not access affordable credit. Following a series of global shocks, such as the COVID-19 pandemic, the war in Ukraine, and resulting high inflation, the CBK tightened monetary policy in accordance with its constitutional mandate for price stability. However, this resulted in higher lending rates due to the increased interest rates and a rise in non-performing loans.  

By August 2025, the CBK had marked its seventh consecutive cut in the benchmark interest rate, the Central Bank Rate (CBR), reducing it to 9.50% from 13% in July 2024 (CBK 2025). Despite these substantial rate cuts, commercial banks were slow to pass the decrease onto their individual lending rates due to the absence of an enforceable policy. This prompted the CBK to conduct investigations and impose penalties on non-compliant commercial banks. 

Introduction of KESONIA

In April 2026, the CBK issued a consultative paper on reviewing the risk-based credit pricing model, proposing the use of the CBR as a standard reference rate for setting lending rates in the Kenyan banking sector. After the public consultation, the CBK released a revised risk-based pricing model in August 2025, based on the Kenya Shillings Overnight Interbank Average (KESONIA). On 1st September 2025, the CBK began publishing the newly renamed loan pricing formula, KESONIA (CBK, 2025), daily. According to CBK, KESONIA, previously known as the overnight interbank average rate, was renamed to align with global standards for international benchmark reform practices (CBK, 2025). KESONIA aims to mirror the United Kingdom’s Sterling Overnight Index Average and the United States’ Secured Overnight Financing Rate (CBK, 2025).   

With this, the CBK aims to increase access to finance in the domestic markets by improving transparency, reliability, and market confidence. The overnight interbank rate is the rate at which commercial banks lend to each other. This rate closely follows the CBR rate after reforms to the monetary policy framework that introduced a corridor band around the CBR rate. KESONIA, derived from interbank overnight transactions, will be used to reflect the benchmark interest rate. This will help consumers better understand how loan rates are set, which was previously unclear.

Notably, KESONIA is only applicable to domestic variable rate loans and will complement the current Central Bank Rate (CBR) in cases where KESONIA data rate is unavailable due to low overnight interbank transactions or when it is impractical to use KESONIA in a variable rate loan agreement (CBK, 2025). The total lending rate, however, will include a premium rate (K) added to KESONIA, while the total cost of borrowing will also encompass fees and other charges.

The CBK notes that commercial banks will need to update their variable rate loan documentation to specify KESONIA instead of the CBR, which will now act as a contingency rate. Existing variable-rate loans will have a six-month transition period from 1 September 2025 to align with the adoption of KESONIA (CBK, 2025).    

Benefits of the New Risk-Based Pricing Model

Transparency is fundamental to the CBK’s transition to KESONIA. CBK will gather and verify data from banks’ interbank overnight transactions, then compute and publish KESONIA and its compounded index daily. This transparency will enable consumers to understand how loan rates are set, anticipate rate changes, and encourage greater credit utilisation, thereby supporting the Kenya Kwanza pledge for affordable financing, particularly for MSMEs. KESONIA also has the potential to strengthen financial market development by aligning Kenya’s benchmarks with international standards, thereby boosting investor confidence and attracting more capital flows.

However, KESONIA introduces variable rate fluctuations, which may increase or decrease monthly loan repayments depending on the monetary policy stance, specifically the current CBR and market liquidity affecting KESONIA. While borrowers may benefit, banks now have the obligation to provide accurate, verifiable data daily.

The Future of Lending

The credit sector has the potential to drive economic growth and prosperity in Kenya. Banks and non-banks, including digital credit providers, should utilise new technology such as Artificial Intelligence and Machine Learning, based on existing data, to better understand and assess their borrowers while creating products that meet their customers’ needs in this volatile, uncertain, complex, and ambiguous (VUCA) environment. Lenders should work with the government and other development partners to formulate policies, like credit guarantees, to reduce risks for customers, particularly in the MSME sector.

Contribution by Mwaniki Mugo, Financial Market Expert