CBK revises credit pricing model, adopts new benchmark rate for loan pricing

The Central Bank of Kenya (CBK) has released a revised Risk-Based Credit Pricing Model (RBCPM) for commercial banks, aimed at strengthening monetary policy transmission and making lending more transparent and accountable.

In a statement on Tuesday, CBK said starting September 1, 2025, all new variable rate loans will be priced under the new framework, while existing variable rate loans will shift to the new system on February 28, 2026, after a six-month transition.

The Bank said the final revised RBCPM follows a consultation period announced on April 23, 2025.

“Comments were received from diverse stakeholders, including banks, development partners, industry associations, non-bank financial institutions, consultancy firms, academia, corporate firms, and individuals. These comments were duly reviewed and considered in finalising the revised RBCPM,” CBK said.

According to the regulator, the framework will align lending to borrowers’ risk profiles while promoting responsible lending. The objective of the revised RBCPM is to strengthen monetary policy transmission, enhance transparency in lending and promote responsible lending by aligning credit pricing with the borrowers’ risk profiles.

CBK said the revised model is anchored on the overnight interbank average rate, which has now been renamed the Kenya Shilling Overnight Interbank Average (KESONIA) to align with international benchmark practices. KESONIA, CBK explained, closely aligns with the Central Bank Rate (CBR) under the current monetary policy framework.

Under the new formula, the total lending rate will be calculated as KESONIA plus a premium (“K”), with the premium covering lending costs, shareholder returns and the borrower’s risk profile.

In addition, the total cost of credit will be determined as KESONIA plus the premium and all applicable fees and charges.

CBK clarified that KESONIA will apply to all variable-rate loans except foreign currency-denominated and fixed-rate loans. Where KESONIA is impractical, banks may use the CBR as an alternative reference rate.

To enhance transparency, CBK has directed commercial banks to disclose their lending details.

“The banks will publish on their websites and on the Total Cost of Credit (TCC) website their weighted average lending rates, weighted average premium (K), and fees for each of their lending products,” the regulator said.

CBK clarified that KESONIA is not a new rate but a renaming of the existing overnight interbank average rate, with no methodological changes.

“The name change aligns with international benchmark reform practices and provides a clearer identity for Kenya’s risk-free reference rate, consistent with global standards such as the Sterling Overnight Index Average (SONIA) in the UK, and the Secured Overnight Financing Rate (SOFR) in the US,” CBK explained.

It added that KESONIA remains a risk-free rate reflecting unsecured overnight lending among banks. If KESONIA data is unavailable, CBK said contracts will fall back to the CBR for that period.

On implementation, CBK noted that banks will need to update systems, legal agreements and pricing models to reflect the KESONIA framework.

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“Adopting KESONIA supports a broader shift to international best practices on benchmark reference rate frameworks. It lays the foundation for further developments such as term rates, KESONIA-linked financial products, and a domestic derivatives market,” it said.

It further noted that KESONIA will be published daily on its website and included in relevant market data feeds and reports.