Variable Lending in Transition: KESONIA and the Legal Imperatives

15th September, 2025

Author: Michael Kontos

On 26th August 2025, the Central Bank of Kenya (CBK) introduced the Kenya Shilling Overnight Interbank Average (KESONIA) as the new benchmark for pricing variable-rate loans.

KESONIA, to be applied as the reference rate for KES-denominated variable interest loans, is not a new rate per se: it is to all intents, a rebranding of the existing overnight interbank average rate, now formalized as Kenya’s risk-free reference rate. Calculated daily by CBK based on actual unsecured overnight transactions between banks, KESONIA mirrors global standards like the UK’s SONIA and the US’s SOFR. It is volume-weighted, transaction-based and designed to reflect real-time liquidity conditions in the Kenyan banking system.

From 1st September 2025, all new variable-rate loans will be priced as KESONIA + “K”, where “K” is a bank-specific premium covering operational costs, shareholder returns and borrower risk. Existing loans must transition by 28th February 2026, following a six-month grace period.

But as the dust settles on the regulatory rollout, a critical question emerges: Can this transition succeed without the borrower’s informed and documented cooperation?

This is where things may get legally nuanced. Most existing loan agreements were drafted under a different pricing regime, often referencing the Central Bank Rate (CBR) or proprietary bank base rates. Is it actually possible for the new reference rate to be altered unilaterally by a lender, even if mandated to do so by the regulator?

Unless the original contract includes a variation clause tied to regulatory changes or benchmark shifts, lenders may have to engage borrowers to:

• explain the rationale behind the transition

• offer revised terms that reflect the new pricing model

• document consent through formal amendment agreements or addenda

CBK’s reform is rooted in good intentions: aligning Kenya’s credit market with global best practices and improving monetary policy transmission. But with the same breath, consideration must be given to the fact that a unilateral amendment of contract terms, especially one which impacts pricing, is capable of challenge.

KESONIA represents a leap forward for Kenya’s financial system. But as it stands, its success hinges not just on regulatory enforcement, but also on contractual integrity and borrower cooperation.

This article is published for general information and academic commentary. It reflects the author’s independent analysis of legal developments as at the date of publication and does not constitute legal advice or advocacy of any particular position in any current or future matter.

 The views expressed do not necessarily represent those of the firm or any of its clients. Readers should seek specific legal advice before acting on any information herein.