When the Central Bank of Kenya slashed its benchmark Central Bank Rate (CBR) to nine percent on December 9, 2025, it wasn’t just another routine policy tweak—it was the latest move in a high-stakes gamble to get banks lending again. The cut, the ninth consecutive reduction since last year, brought the CBR to its lowest level since the central bank began tightening monetary policy in 2022. But here’s the twist: nearly half of Kenya’s 37 licensed commercial banks are ignoring the very tool the CBK designed to make borrowing cheaper and more transparent. Instead of using the newly promoted Kenya Shilling Overnight Interbank Average (Kesonia) as their primary loan benchmark, many are sticking with the CBR—undermining the whole point of the reform.
Why the CBR Cut Matters
The Central Bank of Kenya didn’t cut rates just to be nice. Private sector lending had been shrinking until mid-year, contracting by 2.9 percent in January 2025. By November, it had surged to 6.3 percent—the highest in 19 months. Average lending rates fell from 17.2 percent in November 2024 to 14.9 percent in November 2025. That’s real relief for small businesses, farmers, and homebuyers. But the real test wasn’t just whether rates dropped—it was whether the transmission mechanism worked as intended.
Enter the risk-based credit pricing model, rolled out on December 1, 2025. The CBK’s grand idea: anchor loan rates to Kesonia, the overnight interbank rate, which reflects actual market liquidity. If banks lend to each other at 8.5 percent, the thinking went, their customers should get rates close to that—not 14.9 percent. But here’s the problem: banks aren’t playing along.
The Benchmark Battle
According to CBK data, only about 18 of the 37 commercial banks in Kenya are using Kesonia as their primary reference rate. The rest? They’re still clinging to the CBR. Why? Some say Kesonia is too volatile. Others admit they’re just used to the CBR—it’s simple, predictable, and gives them more control. But that’s exactly what the CBK wanted to fix.
“It’s not that banks don’t want to lend,” said a senior analyst at Fidelity Bank Kenya, who spoke anonymously. “It’s that they’re still trying to protect their margins. If they switch to Kesonia, they lose the ability to pad their spreads without explanation.”
The CBK had anticipated this resistance. That’s why it left the CBR as a fallback option—“in cases where Kesonia is deemed impractical.” But “impractical” is now being stretched to mean “inconvenient.” The result? A patchwork of pricing. One bank might offer a loan at Kesonia + 4.5 percent. Another says CBR + 5.1 percent. Even if both rates end up around 14.8 percent, consumers can’t compare apples to apples. Transparency? Gone.
What’s at Stake for Kenyans
For the average borrower, this isn’t just about confusing terminology—it’s about trust. When you walk into a bank to negotiate a business loan, you expect to see a clear, standardized benchmark. Instead, you get a maze of fine print. Some banks publish their rates on the Total Cost of Credit website, as required by law. Others? They bury it in PDFs or update it quarterly.
“If you can’t compare rates easily, you’re not shopping—you’re guessing,” said Kepha Muiruri, Business Reporter for Nation Media Group, who broke the story in Business Daily Africa on December 11, 2025. “The CBK gave banks a tool to build confidence. Instead, they’re using it to hide.”
The phased rollout adds another layer. New variable-rate loans adopted the new model on December 1, 2025. But existing loans? Those won’t be re-priced until February 28, 2026. That means hundreds of thousands of borrowers—many of them small enterprises—will be stuck with outdated terms for another two months. And when those adjustments come, will they reflect the true cost of money? Or will banks use the transition to quietly raise spreads again?
The Bigger Picture: Monetary Policy in a Fragmented Market
This isn’t just a Kenya problem. Central banks around the world—from India to South Africa—have struggled to get commercial lenders to adopt market-based benchmarks. The U.S. moved from LIBOR to SOFR. The EU shifted to €STR. Each time, banks resisted. But Kenya’s case is unique: the central bank is trying to do this in a market where 70 percent of lending still goes to the government. Private sector credit remains thin.
With the CBR now at 9 percent, inflation is under control (at 5.1 percent in November), and growth is stabilizing. But without deeper credit channel reform, the recovery will be fragile. The CBK can cut rates all it wants—but if banks don’t pass them on fairly, the economy won’t feel it.
What Comes Next?
The next Monetary Policy Committee meeting is scheduled for February 2026. That’s when the CBK will have to decide: do they double down on enforcement, or do they quietly accept the status quo? Options include:
- Publicly naming banks that ignore Kesonia
- Imposing penalties for non-compliance with transparency rules
- Requiring all banks to use Kesonia as the primary benchmark by June 2026
For now, the CBK remains silent. But whispers in Nairobi’s financial district suggest internal pressure is mounting. “We’ve given them a roadmap,” one senior official told a colleague. “Now it’s time to make them follow it.”
Frequently Asked Questions
Why is Kesonia better than the CBR for loan pricing?
Kesonia reflects actual overnight lending rates between banks, making it a real-time market indicator. The CBR, by contrast, is a policy tool set by the Central Bank of Kenya and doesn’t always mirror market conditions. Using Kesonia helps ensure that rate cuts are passed on more accurately to borrowers, improving monetary policy transmission.
How does this affect small business owners in Kenya?
Small business owners face confusion and hidden costs. With banks using different benchmarks, comparing loan offers becomes nearly impossible. Some may pay more than necessary because they can’t spot the best deal. The lack of transparency also makes long-term financial planning harder—especially for startups and informal sector lenders.
When will existing loans be affected by the new pricing model?
Changes to existing variable-rate loans will take effect on February 28, 2026. Until then, borrowers remain under old terms. The Central Bank of Kenya requires banks to notify customers 30 days in advance, but many have yet to issue formal notices, leaving borrowers in the dark about potential rate adjustments.
What happens if a bank doesn’t publish its lending rates?
Kenyan law requires all licensed banks to disclose weighted average lending rates, fees, and premiums on their websites and the Total Cost of Credit portal. Failure to comply can trigger regulatory warnings, fines, or public naming by the Central Bank of Kenya. However, enforcement has been inconsistent, with only a handful of institutions penalized since the rule took effect in 2025.
Is the CBR likely to be phased out entirely?
The Central Bank of Kenya hasn’t said so officially, but insiders suggest the CBR will remain as a policy tool, not a pricing benchmark. If banks continue resisting Kesonia, the CBK may introduce a hybrid model—using Kesonia as the base and capping the spread banks can add. That could force compliance without triggering outright rebellion from the banking sector.
How does this compare to past monetary reforms in Kenya?
In 2019, the CBK introduced the Credit Reference Bureau system to improve credit risk assessment. It worked—lending grew steadily. But this reform is more structural: it’s about changing how banks set prices, not just who gets loans. Unlike past reforms, this one depends entirely on bank cooperation—and so far, that’s been inconsistent.
