Nearly three-quarters of Kenya’s commercial banks have declined to adopt the Central Bank of Kenya’s (CBK) newly introduced risk-based loan pricing framework, limiting efforts to create a more transparent system for borrowers.
A review of lending rates across the banking sector shows that 27 of the country’s 37 banks have chosen to continue using the Central Bank Rate (CBR) as their primary benchmark for pricing loans, while only a handful have adopted the Kenya Shilling Overnight Interbank Average rate, commonly known as Kesonia.
The revised pricing framework had initially positioned Kesonia as the main reference rate for all variable interest loans. The move was intended to improve transparency in credit pricing and potentially lower borrowing costs. However, banks were permitted to retain the CBR as an alternative benchmark.
According to the Kenya Bankers Association (KBA), lenders opted for the CBR largely because they lacked sufficient time to adjust their systems to the Kesonia-based model before implementation deadlines.
KBA Head of Research Dr Samuel Tiriongo said the transition timelines were too tight for most institutions to recalibrate their loan pricing systems in time, making the CBR the easier immediate option.
Most major tier-one lenders, including Equity Bank, KCB, Absa Bank Kenya, Standard Chartered, NCBA, and DTB, settled on the CBR benchmark.
Co-operative Bank stood out as one of the few major lenders to embrace Kesonia, alongside Habib Bank AG Zurich and ABC Bank. Meanwhile, Citibank Kenya and Stanbic Bank adopted a hybrid approach by incorporating both benchmarks.
Five lenders, namely Access Bank Kenya, Development Bank of Kenya, Kingdom Bank, Premier Bank, and SBM Bank Kenya, did not publicly disclose the benchmarks they selected.
Previously, each bank relied on its own internal reference rate for loan pricing, creating a fragmented system with nearly 37 separate benchmarks across the industry. This made it difficult for customers to compare lending costs and complicated efforts to reduce interest rates uniformly across the market.
The CBK had repeatedly criticised lenders for failing to reflect reductions in the policy rate through cheaper credit despite a prolonged easing cycle.
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Under the revised framework, Kesonia and the CBR are closely linked through an interest rate corridor established by the CBK. Kesonia is allowed to fluctuate within 75 basis points above or below the prevailing CBR, meaning the two rates are expected to remain closely aligned.
The regulator maintains that its objective is not to directly control lending rates but to ensure borrowing costs move in line with monetary policy decisions.
Banks began applying the new pricing model to all fresh variable-rate loans from December 1, 2025, while adjustments to existing facilities were implemented between December 2025 and February 2026.
Under the formula, lending rates are determined by adding a premium component, known as “K”, to the chosen interbank benchmark. The premium reflects factors such as operational costs, shareholder return expectations, and borrower risk profiles.
The interbank rate itself serves as a key indicator of liquidity conditions within the banking system, reflecting the rates at which banks lend to one another over short periods.
Currently, with the CBR standing at 8.75%, Kesonia cannot rise above 9.50% or fall below 8.0%, in line with the CBK’s corridor limits.
Earlier this month, the central bank paused its monetary easing campaign, retaining the benchmark rate at 8.75% amid concerns over inflationary risks stemming from rising global energy prices linked to the Iran conflict. The decision followed 10 straight rate cuts aimed at stimulating private sector lending and reducing borrowing costs.
Despite the widespread reliance on the CBR for now, banks say they still intend to transition towards Kesonia over time as discussions with the regulator continue.