A fundamental shift in Kenya's banking sector is underway as commercial banks begin implementing a new loan pricing model, a move poised to make credit more affordable and transparent for millions of borrowers. Starting this week, major lenders are adopting a revised formula that directly links interest rates to a market-driven benchmark, rewarding financially disciplined customers with lower costs.

This new framework, mandated by the Central Bank of Kenya (CBK), replaces opaque internal bank rates with the Kenya Shilling Overnight Interbank Average (KESONIA) as the new foundation for pricing variable-rate loans. The final interest rate for a customer will be the KESONIA rate plus a premium, known as 'K', which reflects the borrower's individual risk profile, the bank's operational costs, and return to shareholders.

Your Credit Score Now Matters More Than Ever

The core change for the average Kenyan is that a good repayment history will now directly translate into more affordable loans. Under the old system, even when the CBK cut its policy rate, banks were often slow to pass on the benefits, a frustration Governor Kamau Thugge has openly noted. The new model is designed to fix this weak link, ensuring that monetary policy changes are felt more immediately in the pockets of businesses and households.

While borrowers with strong credit scores stand to benefit, those with a history of late payments could face higher interest rates, as the risk premium ('K') will be more explicit. Governor Thugge emphasized that the goal is not to lock anyone out of the credit market, but to ensure pricing is fair and reflects the actual risk.

• New Loans: All new variable-rate Shilling loans from participating banks like KCB and Absa will be priced using the KESONIA-based model from December 1, 2025.
• Existing Loans: Customers with existing variable-rate loans have a transition period, with all such facilities expected to migrate to the new framework by February 28, 2026.
• Transparency: Banks are now required to publish their average lending rates, the 'K' premium, and all other fees on their websites and the CBK's Total Cost of Credit (TCC) portal, allowing customers to easily compare offers.

A Long Road to Fairer Lending

The rollout follows months of intense consultations and initial resistance from some corners of the banking sector. An earlier proposal to use the Central Bank Rate (CBR) as the anchor was met with pushback from the Kenya Bankers Association (KBA), which warned it could feel like a return to interest rate controls. The eventual adoption of KESONIA, which aligns Kenya with global standards like the UK's SONIA and the US's SOFR, was seen as a workable compromise.

This reform is the CBK's most significant effort to overhaul credit pricing since the 2019 introduction of a risk-based model, which is now being phased out. By forcing greater transparency and tying rates to real-time market activity, the regulator aims to foster competition and ultimately drive down the cost of credit, which has been a persistent barrier to economic growth. As KBA Chief Executive Raimond Molenje noted, the framework is about giving borrowers a fairer deal and expanding credit to more sectors of the economy.

The coming months will be critical in observing how effectively the new system is implemented across the entire industry and whether it delivers the promised relief of more affordable credit, putting more money back into the hands of Kenyan families and businesses.