Kenya Shilling Overnight Interbank Average (KESONIA) & its Effect on Cost of Funds and Credit Creation

Background

KESONIA is the newly introduced common base rate for loan pricing. It is a transaction-based overnight benchmark the CBK has championed for as the country moves to a risk-based pricing model of credit. Its adoption shifts elements of credit pricing from policy-driven anchors toward market-driven short-term rates. It is hoped to improve transparency on cost of credit, but adds short-term variability and operational transition costs for lenders.

KESONIA formally names and publicises the overnight interbank average rate that reflects actual unsecured overnight interbank transactions. CBK guidance and banking sector implementation means that lenders are expected to use KESONIA as the common base when applying risk-based pricing formulas for shilling-denominated loans. This replaces (or is used alongside) previous reliance on broader policy anchors in some pricing models. 

Key implications:

More granular borrower pricing 

Low-risk borrowers can secure lower spreads relative to KESONIA; higher-risk profiles will face larger premia. 

Day-to-day volatility 

Overnight market moves can introduce greater short-term variability in quoted pricing, increasing treasury and Asset Liability Management (ALM) complexity for banks.

Operational & legal changes

Loan documentation, pricing models and IT systems will need updates to reference KESONIA and handle its daily publication.

Product segmentation

Fixed-rate and many foreign-currency products see limited pass-through; the impact is greatest for floating-rate, local-currency lending. 

Recommendations for lenders & corporate borrowers 

Lenders 

Update loan templates, implement KESONIA-linked repricing modules, and strengthen ALM hedging to manage overnight-driven volatility. Conduct borrower segmentation to redesign spreads.

Borrowers

Negotiate clear KESONIA-based clauses, consider collars or caps for exposure, and review covenant triggers that reference benchmark rates.

Regulators / industry bodies

Publish transition guidance, standardise fallback language, and run market education for smaller banks and corporates.

Sources

Central Bank of Kenya;

Kenya Bankers Association guidance;

CBK Weekly Bulletins.