The Central Bank of Kenya (CBK) has announced the issuance of a revised Risk-Based Credit Pricing Model (RBCPM) for the banking sector after reviewing comments received from different quarters. The RBCPM is based on the overnight interbank average rate, now renamed the Kenya Shilling Overnight Interbank Average (KESONIA). This comes after the monetary authority withdrew its proposal to control lending through the Central Bank Rate (CBR), conceding to commercial banks’ preference for using the interbank rate as the basis for determining borrowing costs.
KESONIA is a benchmark rate that shows the average interest rate at which Kenyan banks lend and borrow from each other overnight in Kenyan Shillings to manage daily liquidity. The name (KESONIA) aligns with international benchmark practices. It provides a clearer identity for Kenya’s risk-free reference rate, harmonious with international standards such as the Secured Overnight Financing Rate (SOFR) of the US, the South African Rand Overnight Index Average Rate of South Africa, and the Sterling Overnight Index Average (SONIA) of the UK.
According to the CBK, KESONIA will only apply to variable-rate loans, exempting foreign currency-denominated loans and fixed-rate loans. Where the use of the interbank rate as the reference rate is not possible, customers may be allowed to use the CBR as an alternative reference rate. Currently, the CBR is 9.50%. Commercial lenders will revise and align their internal processes and documents to use the new benchmark rate name, KESONIA.
CBK’s RBCPM
The Risk-Based Credit Pricing Model was introduced in 2019 by the CBK and the banking sector. The model was set up to address the menace of high lending rates and opaque pricing mechanisms in the credit market by creating a market-driven blueprint for pricing credit risk. The apex bank reassessed the RBCPM and came up with a revised model that additionally seeks to cement monetary policy transmission.
Under the revised RBCPM, the total lending rate will be determined as the sum of KESONIA and Premium K. Premium K is an additional amount added on top of the lending rate to calculate the final interest to be charged to a borrower. It constitutes the bank’s operating costs related to lending, expected return to shareholders, and borrowers’ risk premium. Each bank will tailor its value (Premium K) depending on its costs, profit targets, and borrower risk.
The Total Cost of Credit (TCC) shall therefore be the summation of KESONIA, Premium K, Fees, and Charges. Fees and Charges include origination, processing, negotiation, and commitment fees. The revised RBCPM is set to take effect from September 1, 2025, for new variable loans, while for existing variable loans, it will take effect on February 28, 2026.
Also Read: CBK Reverses Course, Aligns Banks on Loan Base Rate
