Twenty-seven banks have openly defied the Central Bank of Kenya’s (CBK) directive to adopt a uniform, transparent benchmark for pricing loans, that mandated all financial institutions anchor their lending rates on the Kenya Overnight Interbank Average Rate (KESONIA) or the Central Bank Rate (CBR).
For years, Kenya’s interbank market has relied on informal overnight lending rates among commercial banks to gauge liquidity conditions. However, the absence of a formalized benchmark created significant challenges for market participants and policymakers seeking clear, consistent measures of short-term borrowing costs.
CBK introduced KESONIA in efforts to enhance transparency, efficiency, and stability in Kenya’s domestic financial system while positioning the country alongside developed economies with sophisticated benchmark rate systems.
With KESONIA, CBK now provides a standardized reference rate for the overnight interbank market, effectively aligning Kenya’s financial infrastructure with international best practices established by major global financial centers.
CBK’s primary objective was to enhance transparency in the credit market and ensure that monetary policy adjustments, particularly reductions in the CBR, are swiftly and equitably transmitted to borrowers.
However, a recent compliance audit has revealed that a substantial majority of lenders have instead reverted to utilizing their own proprietary internal models, thereby effectively disregarding the prescribed standardization framework.
The defiance by these twenty-seven banks represents a collective pushback against what they perceive as regulatory overreach into their core pricing mechanisms. By choosing to rely on individualized, non-transparent internal models, these institutions retain greater discretion over the final interest rates offered to consumers and businesses.
Industry analysts note that such models often incorporate a broader range of proprietary risk assessments, operational costs, and desired profit margins, which are not directly tied to observable interbank or policy rates. Consequently, the intended linkage between the CBK’s monetary policy stance and actual commercial lending rates remains severely weakened, as reductions in the CBR may not automatically translate into lower borrowing costs for the end-user.
The CBK has responded with a firm statement reiterating its legal mandate to oversee the stability and transparency of the financial system. The regulator has expressed concern that the widespread use of divergent internal models undermines market discipline and creates an uneven playing field, where borrowers face significant difficulty in comparing the true cost of credit across different financial institutions.
Officials have hinted at potential enforcement actions, including administrative penalties or further regulatory guidance, to compel compliance with the benchmark directive. Furthermore, the CBK has emphasized that uniform pricing benchmarks are a global best practice designed to foster trust and efficiency in credit markets, and that any deviation from this path risks eroding the impact of the central bank’s core policy tools.
Market observers and consumer advocacy groups have voiced strong criticism of the banks’ stance, arguing that the lack of a harmonized benchmark disproportionately harms retail borrowers and small to medium-sized enterprises, who are least able to negotiate with lenders. They contend that internal models offer little visibility into how interest rates are derived, often leading to opaque pricing that can escalate the cost of credit.
As the standoff continues, the CBK now faces a pivotal challenge balancing its regulatory authority with the operational independence of commercial banks, while ensuring that the broader objective of affordable and transparent credit access is not compromised. The coming weeks are expected to feature intensified dialogue between the regulator and the banking industry, with the potential for a revised compromise or, alternatively, stricter enforcement of the original directive.
