The Banking Brief: Deep Dive Edition

Audience: African & International fintech & banking professionals and enthusiasts
Read Time: 7 minutes

Golden Nuggets

• Kenya's Central Bank introduces a new loan pricing system linking interest rates to the Kenya Shilling Overnight Interbank Average (KESONIA), a transparent market-based benchmark TechCabal.

• Loan pricing now equals KESONIA + a margin "K" covering banks' costs and borrower risk, plus additional fees, ending opaque lending practices Finance in Africa.

• Banks must publish their interest rates, premiums, and fees publicly, boosting transparency and strengthening Kenya’s monetary policy transmission Central Bank of Kenya.

Kenya Overhauls Loan Pricing Model—What It Means And Why It Matters

Why it matters

Kenya’s Central Bank overhauls the loan pricing system to introduce clarity, fairness, and better economic control. Before now, banks set their own base lending rates, often confusing borrowers and weakening the effect of interest rate changes by the central bank. The new model ties loan interest to a transparent benchmark called KESONIA, making rates clearer and more responsive to market conditions. This change aims to help borrowers understand their loan costs and encourages banks to price credit based on real risks.

Zoom in

How the new formula works:

Lending Rate=KESONIA+K+FeesLending Rate=KESONIA+K+Fees

• KESONIA, the Kenya Shilling Overnight Interbank Average, is the price banks pay each other for overnight loans—think of it as the “market price” for borrowing money overnight.

• Margin “K” is an extra fee banks add to cover operational costs, expected profit, and the specific borrower’s credit risk—like a rental shop adding extra charges for bike maintenance and risk of damage.

• Fees include processing charges or commitment fees—similar to booking or service fees when renting equipment Central Bank of Kenya.

Banks must publish these components openly on their websites and in a central credit cost portal so borrowers can compare rates transparently Finance in Africa.

So what?

For borrowers, this means clearer visibility into how their loan costs are calculated and more competitive pricing for customers with better credit. For the economy, it strengthens the impact of the Central Bank’s policy rate changes, helping to stabilise inflation and growth. However, those with higher credit risk might pay more, reflecting their true risk to banks. The model balances fairness, competition, and responsible lending TechCabal.

Banking Terms Made Simple: Visual Metaphors for Beginners

Lending Rate: Imagine renting a bicycle. The lending rate is the rental fee charged for using the bike. Longer rides cost more rent, just like longer loans cost more interest.

KESONIA: Picture banks as friends lending bikes to each other overnight. KESONIA is the average “price” friends charge each other to borrow bikes for one night—a base cost everyone agrees on.

Margin “K”: When renting your bike, you add a tip for cleaning and risk that the bike might get scratched. This is like the margin "K" banks add to cover their expenses and the borrower’s risk.

Benchmark Rate: A benchmark is the official scoreboard or price tag used to set fair prices. KESONIA says, “This is the going rate,” so everyone bases their calculations on the same number.

Fees (Processing, Commitment): Just like a small booking fee to reserve the bike, banks charge fees to handle loan paperwork or to keep the money ready for the borrower. These are extra costs beyond interest.

Who’s Who

Central Bank of Kenya (CBK)
The referee in Kenya’s financial game, CBK controls money supply, interest rates, and ensures fair play among banks.

Kenya Bankers Association
A club where all bank owners discuss new rules and aim to protect their collective interests with the CBK referee.

Policy Watch

The Scoop

• New loans starting Sept 1, 2025, will be priced under the KESONIA formula; existing loans transition by Feb 2026.

• Banks must publicly disclose lending rates, margins, and fees, boosting consumer transparency.

• Foreign currency and fixed-rate loans are excluded from KESONIA pricing; Central Bank Rate (CBR) is alternative if needed.

• Banks submit risk-based pricing models for CBK review, creating a system checked for fairness.

Startup Spotlight

Tala Kenya uses mobile phone data and AI to lend to underbanked Kenyans who lack traditional credit records. Tala’s tech-driven credit scoring fits perfectly with Kenya’s push for transparent, risk-based loan pricing, enabling more people to access fair loans Tala.

Toolkit

• CBK’s Total Cost of Credit Portal for loan price comparisons

• International benchmark guides: UK’s SONIA and US’s SOFR